Cherry AG
XETRA:C3RY
Earnings Call Analysis
Summary
Q3-2023
Since 2019, Cherry has consolidated its status as a leading producer of qualitative switches in China and is optimizing its operations for the middle and upper segments while leveraging advantages in the entry-level sector. The company anticipates reducing its workforce to about 355 employees from 460, contributing to a leaner structure. Despite a tough Q3, with revenue just under EUR 90 million and an EBITDA margin of 2.2%, Cherry's peripherals business unit compensated for the Components unit's shortfall. Future inventories are expected to decrease by roughly EUR 30 million, forecasting a stronger Q4 in peripherals and gaming. Cherry is projecting a revenue of around EUR 140 million and a 10% EBITDA margin for 2023, with a strategic transition to an asset-light model and an estimated EUR 10 million in annual savings from restructuring efforts.
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Thank you, and welcome, everybody, to our analyst and investor earnings call for the third quarter and first 9 months of 2023. As always, we have all members of the Management Board participating in this call today. Now the presentation supporting this call was also uploaded to the Investor Relations section of our website as well as the unaudited consolidated financial statements, which are included in our interim statement as of September 30. However, if you are not online, or do not have access to the files at this time, you should still be able to follow the call.
Ladies and gentlemen, today's presentation contains forward-looking statements regarding future developments, which are based on the information currently available to the company. As a result of risks and uncertainties, actual outcomes may differ from the forward-looking statements made in this presentation. Cherry does not intend to update these forward-looking statements.
Also, financial figures in this presentation will not add up due to rounding. Finally, please take notice that this call will be recorded, and a replay will be made available in the Investor Relations section of our website shortly.
Now I hand over to our CEO, Oliver Kaltner. Oliver, please go ahead.
Dear shareholders, dear analysts and dear participants in this call, on behalf of Cherry SE, I also would like to welcome you to the Q3 2023 call on November 15, 1:45 pm CET, actually, it's 2 p.m. The Executive Board of Cherry SE is fully represented in this call. So a warm welcome to my colleagues, Mathias Dahn, our CFO; and Udo Streller, our COO. We all will be available to answer questions in the later Q&A session as we always do this.
Coming to the business. In our third quarter this year, we have seen a mixed performance across our various business segments. We ended with a group revenue of EUR 27.3 million and an adjusted EBITDA margin of minus 4.6%. The results got significantly influenced by the following main factors: Gaming and office peripherals still are on track and expectation, with a solid growth for office of around 8% and gaming of 40% in the first 9 months with further market share gains.
Cherry Digital Health and Solutions business unit is behind expectation with minus 32.8%, which is impacted by a reluctance of medical service providers to purchase e-health terminals in the third quarter of this calendar year. And we see significant misses both in revenues and profit in the Components business.
Let me provide you with some more detailed information business segment by business segment. The business performance of Cherry Group's various business units varied greatly over the course of the year. In the office and gaming peripherals line, we were able to record upto double-digit growth and increase our market share over the course of the year on the back of a strong product portfolio, a rigorous strategy of going international and optimized sales management despite an overall decline in consumer demand in the key markets. The main season for gaming product is now, with; a, the various Black Friday windows; b, Christmas selling and; c, after Christmas selling, which is going to take place in the first 3 weeks in January.
Office sales shows constant growth potential to an established hybrid working culture across different industries, company sizes and countries. Some numbers. With revenue of EUR 19.9 million, the Gaming Device business unit also performed better than in the same period of last year. Growth was mainly due to the acquisition and integration of the Swedish e-sport Specialist XTRFY, which took place in January this year, and the product of which obviously really complements the Cherry product portfolio and are now being offered and sold on the market under the new joint premium brand called Cherry XTRFY. The Professional business area generated revenue of around EUR 60.1 million in the first 9 months of the current fiscal year. By contrast, business with e-health terminals fell short of our expectations due to the current reluctance to buy on the part of medical service providers, which is being impacted by external influences. On the other hand, the market remains unchanged in terms of size and relevance for our solutions that have a technical assistance advantage compared to competition. We expect a ramp-up in sales from now on for the rest of this calendar year and ongoing from next calendar year.
The main reason for the decline in revenue in the Digital Health & Solutions business unit were delays in the telematics infrastructure that went on for longer than expected, caused by political and technical factors, affecting the implementation of new specialist applications, such as the e-prescription and the electronic patient record. Due to the introduction of the e-prescription on July 1 this calendar year, which will become mandatory at the turn of the year, and the planned mandatory introduction of the electronic patient records by the end of 2024, demand for e-health terminals was expected to increase in the third quarter. However, as stated, the ramp-up in demand has not yet begun. The change in the system of funding pharmacies and doctors' surgeries for the equipment and operating costs arising in connection with the required telematics infrastructure, TI, which also has changed from reimbursement of the initial equipment cost for our monthly TI flat rate on July 1 has contributed to the general reluctance to purchase. In contrast, business with hygienic and washable input devices benefited from a strong product portfolio and a growing international market environment. Here, we show a good year-on-year increase, especially based on deals that we have now landed over in the United States. The security device business also grew by around 4% year-on-year.
In the final analysis, however, it was the Components business unit that was the main cause of the overall decline in business performance in the third quarter, losses that could not get compensated by the other business segments.
After strong growth in 2021, driven by the COVID-19 pandemic, the keyboard switch business slumped by 62.5% in the following fiscal year. In the first 9 months of the current fiscal year, the revenue decreased by further 51.9%, and the upswing in demand originally expected for the second half of 2023 did not materialize. We also have to keep in mind that the patent on MX1 ended in year 2014. Since then, Chinese manufacturers build strong foundation of production facilities to cover the global market with quality, top price switch for the entry product range market.
So the feedback we have received from OEM parties on our portfolio is straightforward. MX1 is technically outdated and overpriced. MX2 is underpinning Cherry's technology advance. We are back into a leading position from a technical perspective, but manufacturing and selling costs must match with the latest market expectation when it comes to pricing.
ULP is top innovation made by Cherry, with a stand-alone position in the market worldwide. As part of the strategic realignment and restructuring of the business unit, inventories of discontinued Cherry MX switches amounting to around EUR 2.8 million were written down in full. To support the market launch of Generation 2 MX switches, the Cherry Management Board has decided to discontinue the previous technology. On Friday, November 3, 2023, the Executive Board made a strategic decision on the future setup for our component business that got full approval by the Supervisory Board of Cherry SE. The decision got published by network news followed by corporate news the same day.
Let me give you some background on that key strategic change. Due to the lack of competitiveness in the market segment for MX Generation 1 keyword switches, the switch business requires a substantial repositioning. To repeat, in fiscal year 2022 and from January to September 2023, the switch business declined by 62% and 51.9% percentage points, respectively. Despite targeted countermeasures as part of group-wide operational excellence, we expect a significant unplanned EBITDA change in the 2023 fiscal year. The reasons for this development are too low sales margins and too low unit margins in the switch business and the fixed costs are too high as a result of significant capacity underutilization.
As mentioned before, the compensation of those losses by the other business segment is not possible, and it's not acceptable to the stakeholders of Cherry SE in the long term and requires a strategic realignment of the Components business unit. To this end, we have resolved a comprehensive package of measures along the entire value chain of the Components business unit in order to permanently restore competitiveness and profitability in the switch business. In doing so, it is our goal to concentrate more and more on innovative strength again, and at the same time, to ensure more and lasting market relevance and acceptance for the current product range.
Well clearly it is true, we are meeting the expectations of our global OEM customers in terms of innovation, pricing and volume. After installation of the second automated assembly machine for Cherry MX ULP switches at the Auerbach site in June, we see the first fraction of this product line in sales. We also started to sell the first units of the MX2 switch in the third quarter.
On October 1, 2023, we announced that Cherry SE had signed an OEM general agreement with Medion AG to expand partnership for further media product ranges with Cherry MX Technology, the first direct contract in this area. We will also achieve additional sales potential via switch variants localized in China, while significantly reducing manufacturing costs. To secure the improvement potential, we are reducing fixed costs in the global Cherry organization. And yes, the Components business remains being a relevant part of Cherry's overall portfolio of products and services.
So how does the future structure of the Components business unit and catalog of measures look like? Based on the need to realign our switch business, we have made the following management decisions, whereby the sites in Auerbach, Germany; [ Qu Hi ], China; and Vienna, Austria, are closely networked in the operational service areas of engineering, development, production and logistics and adapted to customer requirements.
The Auerbach site in Germany, number one, development and production of MX2 switches for use in own products in the international market; second, development and production of ULP switches in the international market; and third, innovation developments for the MX and ULP product lines with regard to, MX3 and ULP generation. The 2 sites in China; number one, production of office and gaming hardware for the international market; second, development and production of office and gaming hardware, especially for the Chinese and other Asian markets; third, control and quality assurance of the production of MX2 switches for use in Cherry partner products in the international market, this, in cooperation with the new external production partner; and fourth, focus on product innovation and building engineering confidence for innovative gaming products in China with local development teams and start-ups that are located in China.
Talking about the Vienna facility. Number one, it's all about the development and production of e-health terminals for the international market; second, development and production of PIN pads for the international market; third, development and production of IoT sensor technologies for the international market; and fourth, software development for the medical field and others also for the international market.
The new collaboration partner in China is responsible for the production of MX2 switches for use in Cherry partners' products in the international market. The goal is also to build engineering expertise for innovative gaming products such as switches, hardware and software with selected local development teams and start-ups in China. So we're going to ramp up China as a total, but as we are in that market, established with an own facility, obviously, we're already looking back on a very strong legacy.
While the production of Cherry office hardware, including [indiscernible] keyboards and mice for hygiene, makes it an industry for the international market, we continue to work with production contract partners also located in China. Through these measures, we are networking the 3 facilities more closely and efficiently with each other than has been the case to date, thus strengthening their future viability in the market. And again, we're talking about the 3 facilities that are fully owned by Cherry.
As a result, Cherry SE is increasing its competitiveness in all business areas across the entire product portfolio and tapping into the potential for significant cost savings and earnings improvement, while ensuring compliance with Cherry's typical quality characteristics and specifications.
Since 2019, China has demonstrably developed into the core production country for qualitative switches in the entry level and volume market. We're taking that into consideration. It is important to focus as Cherry again, in our own innovative strength in the middle and upper segment and, at the same time, to take advantage of the advantages in the entry-level segment if we see that case by case [indiscernible] Over the years, Cherry has built up a stable base with a high-performance team in China from engineering, through production, marketing and sales. It's one of our best-in-class teams that we have. Our new strategy will benefit from this, and our partners and customers will also benefit just as said.
In this way, we underpin our claim to market being relevant, innovation leadership, product quality, volume solutions of all sizes, pricing expertise and profitability. As we go through a broad and wide resetting, these measures are part of the planned overarching reorganization of our group structure and organizational structure as part of ongoing operational excellence with the following characteristics: Number one, minimizing the number of legal entities in the first step by merging active Key GmbH with digital -- Cherry Digital Health GmbH. Change of legal name from Theobroma Systems Design and Consulting GmbH to Cherry Embedded Solutions GmbH; third, global structure from product development, product management, marketing, sales, finance, et cetera; and fourth, the adjustment of the organization size from currently 460 full-time equivalent employees to an anticipated total of approximately 355 effective March 30 next calendar year.
Now Mathias, please provide us with some financial data on Q3, but also the rest of the year, and with regard to the resetting measures, please take on.
Thanks, Oliver. Let's stay at the [ last ] slide for a second. I'm not going to read to you all the figures. I think the most important item that I want to highlight is that even though Q3 was not as we intended it to be, the most important message is that the other 2 business units, in particular, the peripheral business unit, was able to counteract and compensate partially the profitability burden that the Components business has put upon us. Revenue after 9 months just under EUR 90 million, EBITDA at 2.2%, still there is 451 staff that Oliver has just referred to. Ongoing M&A, net debt at EUR 0.8 million and operating cash flow, I will come to that in a minute, but I'm not going to read all the data to you. You could retrieve that already, I trust.
Again, key financial indicators. Group revenue in sort of a mix bag. Solid growth in office and gaming. Increases in market share, however, not absolutely unsatisfactory development in Components with over 50% year-on-year decline. Oliver has elaborated on the MX switches, and we come to what we have done and what we have initiated in a minute.
Digital Health, already characterized by Oliver. Customers reluctant to purchase e-health terminals in Q3 continued with revenue down just over 30%. And I think the most important message here on the right side, gross profit margin negatively impacted by the inventory write-down for the MX1 switches and as well, the EBIT margin, mainly driven by reduced gross profit, but the -- and I will come to that in a minute, the unplanned operating loss from Components business units.
Inventory structure. Finally, we are moving in the right direction. We stopped or, let's say, cut inventory inflow at the beginning of the second quarter -- let's say, in the first half year. So as these goods are shipped from China, it's natural that stopping on Day 1 does not mean that the inventory buildup stops on Day 2.
But so we are here, let's say, witnessing the effects that we have initiated in H1. Clearly we are not happy with what we have achieved so far, but the main and chief important message here that I have on that slide for you is that, with the strong business that we anticipate in Q4, in particular, in peripherals and gaming, we will bring the inventory, the year-end inventory down by roughly EUR 30 million -- in the vicinity of EUR 30 million, might be a little more, might be a little less, but I think EUR 30 million is the right figure to run with right now.
Obviously, Q4 has 3 months, and even those months have weeks and days, we can't really tell in which exact time the cash will be collected. So some of that will drop into Q4, some of that will drop into Q1 of next year. But I think the most important thing is that this EUR 30 million will be realized following a strong pickup in demand or a pickup in revenue in the fourth quarter, in particular in peripherals and gaming.
On the cash flow side, you see that the picture has not changed much. We are still suffering from high inventory buildup. We are still seeing not -- let's say, net working capital increases year-over-year. Definitely, for me, however, important to focus on the second big bullet on the right side. We see a sequential improvement in quarterly cash flow development after minus EUR 17.8 million in the first quarter, still disappointing minus EUR 8.7 million in the second quarter, but now we are at minus EUR 5.2 million. So you see that the trend is definitely moving in the right direction.
And again, with the strong reduction in inventory that we foresee that will be reversed in the upcoming quarters.
Outlook for 2023 specified. So we specified our revenue and EBITDA guidance to around EUR 140 million in revenue and around 10% in EBITDA margin. The midterm key targets are unchanged. So they, I think, have been up just after the second quarter. But now, for me, the most profit issues are on the right side here. The EUR 10 million losses in components was never budgeted and never anticipated. We realize those -- we realized that the Components business was having those issues. And our answer is pretty swift. Having realized [indiscernible], we counteracted, we came up with a plan, which we announced beginning of November, if I'm not mistaken, and we will be super swift in execution so that, as Oliver has pointed out before, the Components business will no longer be able to make these losses.
So basically, in our midterm outlook, you can find it in the top -- sorry, in the bottom right corner. We will unlock EUR 10 million of annual savings -- around about EUR 10 million annual savings. And those will -- after we provide EUR 11 million for provisions in jobs costs and other external costs, they will be effective from day 1 in -- sorry, in Q1 in 2024.
So we looked at the Components business. We realized that we have an issue there. We counteracted superfast, and the Components business after restructuring will no longer be able to come up with losses of that magnitude.
In the middle, we just gave you a little bit of a precise view on how the restructuring charges are going to look like. We booked them in Q4 and EUR 11 million provisions for the job costs and other external costs and EUR 9 million for noncash impairments of property, plant and equipment as well as EUR [ 2.8 ] million of MX1 switches that we have written down in Q3.
All in all, that will allow us to come back to a very profitable business in the midterm. Again, I think for me, the important message here is that even with 2023 not as delightful as we had hoped for, the 2 business units that are not components are showing with great, let's say, strength that the underlying business performance of those 2 of the remaining business units of the Cherry Group are very strong. They underpin our earnings potential. And also in order to rectify, let's say, the issue that we have in the third segment, we came up with a restructuring plan that we are executing as we speak.
If we're not talking to you, we are just in the middle of execution of that restructuring.
With that, back to Oliver, the and the outlook for Q4.
My comment to start with on that slide is that we became better now in terms of tracking our sales now from our warehouse, to distribution, to the retailers, to the e-tailers, up to end consumers and end users, that means like in both lines, B2B and B2C. What we see right now with regard to Q4 is that, obviously, there was a negative impact in Q4 last calendar year by the fact of the change of the Chinese distributor, something that obviously has been managed, and we're now looking forward to the Chinese season, obviously, gearing up compared to last year's quarter.
Second, obviously, we see an ongoing development of our international strategy, especially for gaming devices and office peripherals business, with a better penetration in the key European markets and also the U.S. market. And the second element that is not reflected here on that slide is that we see the hygiene medical products from Active Key, we are really gaining some more traction also here in the United States. And the security business also doing -- on track, obviously, also very much driven by businesses we see in the United States.
It's very clear that when we're talking about B2C products, this is now the major season. You see kind of Black Friday activities on Addison, but you see that across all the different type of e-commerce platforms. The Cyber Monday and the holiday season around Christmas, not to forget again, the first 3 weeks in January are pretty, pretty solid kind of revenue contributor for all our businesses that we're in when it comes to gaming and office peripherals.
We also have some product launches and updates of products here in the Q4. That means like we have enough kind of suites that we can really share on the influencers, e-sports organization, but also obviously on social media, which is going to really create a certain kind of an extra push.
And the latest on e-health terminals and PIN pads is that obviously started in October, we see that there is a swing going north with regard to increasing kind of sales there. We're also tracking the kind of inventory that we have with our partners. We are mainly using distribution and system house partners. And given the fact that we have that kind of legal construction there starting 1st of January, obviously, we now also go back to our parties and say, Look guys, you really need to fill the market with the appropriate amount of volume that is required, given the fact that, obviously, everybody is asked to really go e-health terminal and using digital PIN pads solutions for the upcoming solutions, again, required by the social -- by the political parties.
These are the kind of major impact assets that we see for Q4.
This is it, obviously. We would now kindly ask you to start the Q&A session again. Again, it's Udo Streller also in the room, Mathias and I, so please, going back to the operator to really collect the questions. And yes, very happy to really take your questions from now.
[Operator Instructions] And first up is [ Oliver Fye from Bankhaus Maxler ].
I hope you can hear me?
Yes, we can year you.
Perfect. I would start off with 2. Regarding Q4 maybe and the pickup you expect coming up. Can you give us some insights on how Q4 started? And if you can already see an acceleration on top line, knowing well that the major events like Black Friday and Christmas are still ahead. And maybe on adjustments for the full year, as of 9 months, we can see around EUR 5 million of adjustments. You talked about the EUR 20 million expected for the restructuring.
Can we look at EUR 25 million for the full year, maybe some insights on this part?
I take the first question. I would then obviously give Mathias, the opportunity to give you an answer on the second one. From a pure operational perspective, obviously, what we're doing is currently, and that started obviously in October, we're simply laying out kind of deal term sheets out to our partners. And what we usually also do is we kind of oversell what we have on this inventory. And currently, obviously, it's very much our focus to really sell what we have on inventory on finished goods. And we have seen some nice traction already in October. But again, to be quite frank, given the fact that, obviously, this is a very kind of backloaded business in the fourth quarter, we now have to really look into the next 6 weeks. This is the -- these are the kind of weeks that really make it -- make the difference there.
Specifically, the next 4 weeks, obviously for the Christmas, and obviously, it's the last 2 weeks in December, where we really need to reload the channels for the first 3 weeks in January. So it's really now the time to really get all the deal term sheets back and to really start the logistics in terms of putting the products from our warehouse to our partners. So it's now the chance.
So as to your question in regards to the adjustments, we said that we would have around EUR 11 million of a provision that we built. These obviously do not touch EBITDA because we had [indiscernible] for them. We have already written down the EUR [ 2.8 ] million in MX switches in Q3. Those will be adjusted or have been adjusted. The rest, obviously, is not touching EBITDA because these are noncash, non-EBITDA items. So if that is a proper answer to your question.
And the next question is Marie-Therese Gruebnerr from Hauck Aufhäuser Investment Banking.
A couple of questions from my side. In the EUR 140 million of sales you are planning now for the full year, how much is budgeted for e-health alone, not e-health and security, but e-health in Q4? We have like EUR 3.3 million run rate roughly for the first 9 months. So that's my first question.
So Marie, we gave you guidance for the full year for the full group, and that's it.
Okay. Okay.
Sorry for that. You did try.
Okay, right. Yes, I did try. Now next question is the R&D spend. There was a bit of an acceleration in Q3 at 5.1% of sales. What kind of ratio is targeted for the full year?
I think here, it's wise to look at the outlook for the years to come. We have said what we wanted to say about the R&D expense ratio. It will be between 3% and 4.5% in the midterm. And I think for this year, I believe, we do our utmost to reach the adjusted EBITDA margin, but breaking down the figures line by line, I would say it's not making too much sense to me right now.
All right. Okay. So I'll skip the next one. Maybe CapEx question. We had EUR 6.6 million of your CapEx as of 9 months. What are you budgeting now in light of the latest change in strategy for MX, for switches?
So we are not -- I think I've said this before. We want to go from an asset-intensive to an asset-light business model. Please keep in mind that in terms of accounting some of the IFRS 16 items are considered investments for, if you ask me no good reason. But we don't plan to have any, let's say, investments that I would also call an investment like in machine equipment, new facilities, no, nothing. We don't have any plans to do any of this.
So we should stick with the EUR 6 million roughly of CapEx full year. So there's nothing coming in Q4?
No big things coming in, if it's not related to IFRS 16, no.
Okay. And then the cancellation of the MX Gen 4 machine orders, is this resulting in any penalties?
From who, if I may ask? No, the penalties...
I don't know. Because you ordered the machine and you're not taking it. So...
Don't get me excited on this. The thing is here, we are absolutely down by the supplier. We intended to have significant cost savings with the MX Gen 4 machine, they are not coming and the supplier simply let us down. So if you ask me, is there a penalty upcoming? Well, my question would be to who, because basically, my question is to the supplier, how could you let us down? And what are you doing to compensate?
I'm not saying that we are suing. I'm not saying that we're going to get any compensation. But the thing is, we are not at fault here. We are not a bit at fault here. Let me put it that way.
And please allow me add there. We terminated the contract merely by the fact that the performance was not met according to the contract signed.
Next is Julian Dobrovolschi from ABN AMRO ODDO BHF.
I have 2 with small follow-ups, if I may. The first 1 is on the switch kind of expectations for Q3. Is I think...
I need to interrupt you. You are barely audible.
Can you hear me now?
A little bit better.
[Technical Difficulty]
No it's less about the volume there, I may say it's more but we have a lot of interruptions there. Most probably your line is not all right.
I'm going to switch to [ the other phone ].
Your line is not solid, yes.
So we take the next question and this is...
Just loop him in later.
Yes. Yes, exactly. So next is Miguel Lago Mascato from Montega.
Hope you gentlemen can hear me well?
Excellent. Yes.
Great. All right. So first off, you mentioned component is still a core part of your, let's say, company and strategy. But now you have sort of an external provider for the MX2 switch business, which is like the, yes, the sales driver for the next year, I guess, apart from ULP, now that you have MX1 discontinued. Do you see any major risks from these outsourcing? And how is negotiation going with the sales partners for the MX2?
Let me just sort it out to be very precise. We still keep MX2 production in Auerbach for our own products, our own keyboards. So we still remain MX2 production also in Germany. Obviously, we had the chance to really look into the requirements given by OEM partners, and they're all fine with having MX2 production out of China again, which is already the core market when it comes to switches, anyhow. That means like we need to ensure, and it's one of the requirements, obviously, need to be managed by our COO and our Chinese team that all the quality requirements from engineering throughout production, throughout logistics are going to get matched but it is a very normal procedure, quite frankly.
There is one thing that we also have to bear in mind is with the new kind of cost structure that we have in terms of production cost dynamics to our competitiveness in the market is going to increase significantly. And this is something that specifically OEM parties are also looking into. So quality, number one; price relevance, number two. And then obviously, it's all about innovation. And personally, I can say like, I need to look at Auerbach as becoming, again, more an innovation center rather than the volume production facility.
And with that swing, obviously, we are now kind of taking the best out of the countries, which is top class production in China and top class innovation that I'm expecting in all those lines from Germany.
And to add, I mean some real operations side. The [ subcon ] model, the [ sub con ] contract we will have with our partners, it is basically will ensure that it's a Cherry switch. It's Cherry switch manufactured with a partner, but all aspects to being a Cherry switch.
I didn't catch the last part on the operational side.
Sorry, again, I mean I only summarize that I say, what we are manufacturing there with a partner will be a Cherry switch in all aspects; quality, performance, all kind of aspects.
All right. Yes. No, that's sure. So you don't have -- you don't expect -- or do you have sort of extra quality management measures you are taking there in order to ensure this is what you just mentioned?
Yes, for sure. But, one element that we, as already mentioned by Oliver, we have our strong team into it already, and we will strengthen it further taking care so we really are at the site. I mean we know the sites, and also we know the places, we know also the partners for years already. And the second point is, of course, all the qualification for the [indiscernible] this will be ensured by structured and extra measures for -- to ensuring the quality with fixed procedures, KPIs and frequency of control and all these elements, for sure, yes.
Okay. And you've worked with this supplier before. You know how the quality is supposed to be over there? Or anything you can...
Let me say like this, as we have not finally decided which partner is it, but we know them, also we have visited them before already, even kind of preaudited them before. And even we also had -- indirectly, we are [indiscernible] for some business relationship already with some of them.
Let me add 2 things here because I think like it's something that might be relevant for the broader community. We should not look at China as being a kind of a cheap production country in that segment because they already have kind of proved what they can do. And by the way, they have proved it in our own Cherry facilities. And the second thing is, if we look at the component business overall, we should not look at the business having switch generations for longer than 5 to 6 years, quite frankly. That means like we ask our teams to already start developing off MX3 and ULP2 because this is going to really give us the advantage always to be the innovation leader taking the 4 to 5 years in maximizing volume and sales. And at the same time, we're going to again restart looking into engineering the next generation. That is exactly what we need to do.
What is definitely the correction of error to look into the German facility side being a volume production side. And that's exactly the thing that we have now changed, and we're very much looking forward to the next setup. And again, since we are now discussing also straight to the OEM partners, that's the model that will be very kind of beneficial to all the parties being involved.
Okay. A quick and maybe last question from my side for the time being. Can you just elaborate on the last part, discussing with OEMs contracts apart from Medion? Do you have anything to share with us in a more abstract way?
If we would have something to share, then it would be based on 2 signatures that we would see on the last page on a contract. As this is not the case, we did not start to communicate that, but I can tell you that I'm looking into a pipeline that is promising. And Medion AG is an important start as Medion AG is the German partner of the big Chinese company called Lenovo, and they made a very successful business happen, obviously, not only in Germany, but based on how do we combine German engineering with international production to fulfill all the requirements on international markets. So I'm kind of looking into that with a solid level of conviction that we get into the next and to the third.
And now we have Julian Dobrovolschi from ABN AMRO-ODDO BHF in the line again.
Can you hear me a bit better now?
Yes, it's 10x banner.
I changed the peripheral probably to talk to everyone. Just a couple of questions to follow up on the switch business. So I think in the press release, you said something that the you expected a bit of an upswing in demand originally from Q2 to Q3, so basically actually to generalize from H1 to H2, and you hadn't really seen that one happening in Q3, and therefore, the restructuring measures that you drill down to execute on.
I was just wondering if you can explain a bit to us based on what kind of assumptions you're expecting this upswing to happen? And actually, what exactly happened there? And maybe if you can also speak a bit about the underlying market of the switch component business?
Oliver will talk about the underlying markets and let me just give you a clue on the [indiscernible]question. We don't know. We went there. It was the assumption that post-COVID, the market had a downward trend in '22 and that a natural rebound sort of in [indiscernible] commerce, a natural rebound would set in, which is a meaningful assumption that just didn't materialize.
With regard to the overall market, obviously, number one, all the OEMs looking into 2024 as a starting year of the next level of generation of notebooks and also keyboards. Second, we are going to see already different types of switch developments in the market where it's not only kind of a piece of hardware, but the piece that is also kind of getting connected with software solutions, which I think like it's most probably one of the most promising and exciting things that we see in this segment.
And at the end of the day, we have seen so many touch devices in the market, while at the same time, the switch keywords have seen a fantastic growth path also over the next years. And that's exactly what we see for the upcoming years.
So it's still a market segment that is promising. And that was one of the things that we have looked into specifically when I said like we're not giving up the Component business then because of this. Then because of the fact that switch will remain an important business line of Cherry, but as I also stated, from January onwards this year, it's not the core line, but it's an important line. And we're going to incorporate that business line into our own and our partners' finished good products in the way that users also will see that Cherry is still committed to provide them with the best-in-class and highly innovation top-level products that we can offer them.
So we're absolutely committed to really keep going.
Understood. And maybe also kind of a follow-up in a way on this, but also relating to the write-down of inventory of the MX1 class switch. Can you please bring it back to basics to us and explain what is the fundamental difference between MX1 and MX2? I remember IPO, it was the discussion only about the MX RGB product, so it wasn't really, let's say, difference between 1, 2, 3 class whatever. But now we were speaking about basically forgetting about MX1 class and switching to MX2. And frankly, I wasn't able to find any kind of say, proper technical characteristics between what's one and what's the other one. Can you please explain a bit to us and basically why MX2 is such a more future-proof product than MX1?
From the technical side, first of all, MX1 is the design that has been in stay since many, many years without any upgrade. The MX2 had several elements of course, it is also published on our web page in really technical improvements to make it basically up-to-date and as a leading product. So means that the lubrication, we have also a difference in the spring geometry. We have better stabilization, more precision. And basically, the touch feeling from it is improved. And also out of this, we have quite positive feedback from the user side. Also, as Oliver already mentioned from user insight, in the end that makes version 2 is a different version. So I mean it's a new product, definitely.
MX1, as I said already before, we need to underline, it is outdated by technology and also by price, and therefore, it's basically not sellable anymore at least from the price level we have.
I guess, among the different types of, let me say, uplift on that product, there is 1 thing that you can experience immediately yourself, which is the precision at every press. Because what clients, that means like end users always come back with in times when they are going to use even more kind of keyboard experiences based on the home work and home office, they clearly say like, "I don't have a very precise type of keyboard." And quite frankly, it's not because of the tap, it's always because of the switch. And that means like since we're going to see more writing on keywords, it's really exactly what it is like here. The second thing that is so important is -- and I think that it's a fundamental strength of Cherry quite frankly, is a lot of the performance requirements have been developed on the gaming side, which are now going to get converted into the office products.
That means like we see even more kind of upside on the performance curve of the switches and all the finished good products based on requirements that have started in gaming and now getting headed over in office. And that's a kind of a constant look and listening to what end users are sharing with us. And that's what I also said like we should get rid of the thinking that we're going to keep next generation out there for 5 to -- more than 10 years. It's really about like we have to go back into an innovation engine that is providing next generation within 5 to 7 years to really fulfill all the future kind of user needs that we see across the lines.
And this, let's say, 4, 5 years ahead R&D development that you do on the stand-alone, just basically Cherry doing their own thing and try to kind of, let's say, push the R&D envelope even further, or it's also in the partnership with, let's say, OEMs? Because I believe, for example, in terms of the ULP switch, I guess that was designed in partnership with the [ laptop ] manufacturers, right? Otherwise, how can you design a product that you think could be, let's say, the best one in the market in terms of also integration aspect when probably, if you look at Lenovo even or let's take the other one, of course there, which is a big enough customer of yours, are they also designing, let's say, their product 5 years down the line, thinking that eventually, there will be a place for a Cherry switch in that?
Yes. That's a very good question. Let me try to answer that in a very linear way. Number one, obviously, there's a clear level of expectation when the OEM partners look at Cherry, and are torn apart you guys need to try to innovation. If you guys are not going to really become more innovative, then obviously, we're simply going to look into the market and grabbing some kind of standard models. That's 1 thing. But now with MX2 and specifically ULP, we have it back in the market that we are an innovative company.
Second thing is, now working closer with all the OEM partners, it's very clear that they're now going to share their requirements on the future product road map with us. And that means like we are now in the moment to really also processing some kind of customization development, which is amazing. Because we didn't have that type of direct feedback from the OEM partners in the years before. We were always kind of just delivering what was the OEM partner sharing with us, and it was very much the standard. And we've had a nice wave in that standard with business market, but quite frankly, as again, we need to go back into innovation mode.
Now having said that, we are very open to any of these type of technologies, but fundamentally, we must be the innovation engine. That's the part. And again, we are also looking into now starting already internally what should be the MX3 generation look like, ULP, stand-alone innovation, stand-alone product. There is almost nothing that I can look at as being competitive in the next years. Having said that, I'm asking our people to start already with ULP2. That's the moment of truth. This is where we can really have something that is very extra to everybody, and everybody is getting back to us ideally saying like, okay, we would like to start any kind of co-development with you guys. We're open to that because we believe in the engineering power.
At the moment, there are no further questions. [Operator Instructions] And now we have Jean-Marc Muller from JMS Invest in the line.
Oliver, I have a question for you. I mean you have a lot of experience with listed companies, unlisted companies, private equity. You're basically telling us that you will produce EUR 14 million of EBITDA this year and then the cost savings come on top. So you will do some EUR 24 million next year. I mean that's a very simplified math, but that's roughly what you're telling us. I wonder why don't you pair with the private equity and take this whole thing private?
It's an interesting question. I don't think that's an appropriate question in that Q3 earnings call, quite frankly.
Okay.
So Mark, let's put it on. I took over a mandate January of a listed company. Udo is with the company, which was a listed company before since April last year, and obviously, Mathias gladly joined us as well. We are doing the best for the company. And based on this, we're doing the best for our shareholders. And I took a mission on a listed company, and I do my best every single day to do the best for the listed company. And all the rest is out of my hands, quite frankly.
Yes. I mean you could actively work towards such a solution. If the company -- is that earnings powerful, I mean that would obviously be a solution, which should have crossed your mind? I mean not just yours, but the whole management team. I mean, you could obviously stay on and -- in a private...
Again, I don't think that this is the audience. But I would also like to say like, I'm committed to take the company through this calendar year, which was clearly laid out as a year of transformation. What we have identified is that we need to change a business that used to be seen as the core business, but even more we are not kind of starting to complain about what we have taken over, and we did not stop with the analysis. What we have done is even further going into kind of a business model that is enriching our overall product portfolio by taking component back to life.
And I'm thrilled by that, and I am thrilled by the fact that I know that based on 2024, we personally all can focus even more in driving towards a hardware, software and a cloud-based company. And quite frankly, I will personally be very delighted to spend more time on the cloud side and the software side of the business. And again, I wanted to do this in January because this is my mission.
I have no doubt.
But basically, quite gently what we have identified on top drawn mark, and on a very serious note, I have a strong conviction of the substance of that company, and we sorted out things that sometimes you have to sort out. But looking ahead of time, obviously, this will become a hardware-software cloud company.
And now we have [indiscernible] Research in the line.
Just quickly from my side. Can you talk a bit as we've probably seen very clearly this year had a project in nature of the Digital Health business. What sales level, in Digital Health do you consider recurring without any specific mandatory changes regarding the infrastructure or whatsoever? So what's your kind of underlying sales base, that is the first one?
Keep going.
Probably just do it 1 by one, it's probably easier for all.
Yes that would be helpful. So the way we look at the e-health business is quite clear. There is a remaining market potential for hardware solutions. The good news about the hardware solutions is there is already incorporated software. That means like the company was kind of very thrilled selling hardware for many, many years. I am thrilled by the fact that since we have already incorporated software, I can really let's say, uplift and upgrade our installed base over a period of time. In order to do so, we need to have more services.
Now there are kind of services like the e-prescription and other services that are floating around the market anyhow. They need to go through a certification process, as you all know. But this is clearly underpinning the fact that we're talking about the beginning of the digitization in medical sector.
Now having said that, based on the very nice installed base that we have there, we still can sell hardware for some years. But even more important, I would like to enrich the overall, let me say, services that come in with the installed bases over a period of time. That means like we're going to keep selling hardware. We're going to see especially that PIN pad is going north, which is fantastic. But again, my focus with the team is very much in terms of how can we enrich the software by adding new services and by enabling services to really get connected to our solutions there.
And we have...
Probably now if I quickly might jump in? Do you think you need to acquire some more software on that part? Or do you think you have the in-house power to enlarge...
So we have a very strong in-house team, which is located there in Vienna. We're going to see them refocusing on Digital Health and medical sector related software development. But it's a really strong team. I mean strong in terms of high-performance level. They're really keeping the metrics and the time lines and the milestones, which is fine. But, quite frankly, this wouldn't be sufficient. That means like our M&A strategy is clearly focusing on searching for companies and service partners that are going to enrich our kind of ecosystem that we're going after. And when it comes to cloud services, let's be very clear, this is something where we don't have the capacity. That means like we're going to look into companies that we're going to add to our portfolio.
Okay. Understood. And then going a bit to the switches part. Well, in the past, you've been -- you've positioned yourself also in the old MX1 line with a substantial price premium relative to the, say, copycats or the guys like Kyle. So how are you approaching that now with your realignment? What kind of price premium should we assume relative to Kyle, or if you could give us an absolute number that -- per percentage what would be helpful?
Very good question there. Still the market looks at Cherry as a brand and a provider of innovative switch units. They will accept a certain kind of a price premium. But having said that, as we're going through a massive times of financial and kind of operational rebuilding the business here, we need to look into the manufacturing cost. And from there, obviously, we do the math in the future. But again, there is a certain extra that the market will allow us to get out there. Is that something that we have, let's say -- let me say that we have kind of put into the market in the past like a price premium of 4x, 5x, no, forget that. That's not the way -- that's not the market that we're in anymore.
And again, we have to also be very clear, we see Chinese production facilities. They have started to run the business in 2019. And since then, obviously, they really ramped up some top class quality production, but they're very much in the mass volume side, right? And again, there, we are not going to compete with them anymore because they're looking after, I don't know, 800, up to 800 million up to 1 billion units per year. This is exactly the area where we need to step out, and where we should not be even connected with.
We are the ones, we can deliver top class innovation on a very reasonable pricing that is really kind of matching all the market needs. But again, we need to thrive via innovation, and that's a different price model. And ULP, for instance, is a good example. There is no kind of competition out there, and we're not expecting any kind of competition in the next years. That means like we're going to ask for the price that is relevant for the top class innovation.
But again, we also would like to see that we're coming up with more deals in that segment, and that means like we're going back into collaboration and negotiation model. And it's a very normal way to approach. But it's a different model compared to the last years because in the last years, we were more in the kind of position, okay, we wait for your purchase order. I'm more into, "let's sit down together and negotiate a good deal."
We have 1 follow-up question, which comes from Julian Dobrovolschi.
Just a follow-up on the Health Care business. You seem to be making a big bet purely on the telematics infrastructure over the midterm, so basically, let's say, the digitalization of the health care infrastructure from Germany. And with that hoping to transform the company somewhat into a mix of cloud, software and hardware business. Just wondering how large is the opportunity there? And if you could size up for us the total addressable market purely from Germany.
That's definitely something that is too early to talk about, quite frankly. What I can say is that, so far, the focus of the company was very much based on the German-speaking market. The more we get into the digital play, obviously, the more international we can get. And also 1 kind of news I can share with you. We are quite pleased to see how we have succeeded with our hygiene medical sector product based on the active key brand, over in the United States, by simply changing the outreach as a sales model because the product is so relevant.
But now it's even more important to say like, is that now a single product solution sales, or is it about like, hey, look, this is what Cherry stands for. This is how our overall portfolio that we have in the market. As you can see from that statement, or as you can take away from that message, it's very clear that we have so much more potential in that segment also by reorganization of our way that we're approaching the different type of market.
I look into the Americas, I look into key European countries, but I also have to say like we can still learn a lot from the Nordic companies as the Benelux, as we even can learn in the digital medical sector from Spain, but none of this market is not completely saturated. So there is so much we can go after.
Understood.
It's not going to help you with any of your models there because I didn't share any number, but apologies.
Not at this time, but just having a bit of a high-level understanding of how this -- how big this could get?
Okay.
Thank you. We do not have any further questions.
Okay. First of all, thank you for obviously being on the call. And thank you, obviously, for being on the journey with us. As stated before, it's been a wild ride over the last 10 months, but it's been a wild ride for the good of the company. And again, the most important key takeaway is that; number one, we have a team of 20 top class leaders in that organization worldwide, including 3 board members. We are completely dedicated, and we are completely committed to that mission; second, we have a strong conviction that we're going to fulfill that mission to turn that company to hardware, software and cloud. We already have a lot of software in our hardware, but we never talked about that one. And that's so much, but we can still do it. And the third element is, quite frankly, we have now kind of sorted out things that needed to get sorted out. But looking ahead of time, it's very much about leading the company more from an EBITDA perspective rather than from a top line perspective.
Gains are over in terms of everything is fine. The cost structure is as good as long as you're generating more top line. No, our approach is exactly the opposite. We would definitely not go after a top line business in the future that is not providing us enough EBITDA, and that's major kind of 180 degrees swap in the company, but it's for the good and it's for the sake of the company and therefore, also for you as shareholders. Thank you again for being on that mission. Thank you again for obviously accepting that this was a kind of a wild ride. The year of transformation is going to hopefully end by the end of December.
We're going to see some kind of adjustments, changes in necessary things that we need to really get done in order to really reshape that organization, reshape that business, but it's promising, it's hard work, and we have to really take the next lap, obviously with the upcoming fiscal year looking very much forward to that on you. So thank you very much, obviously, for being on the call. Thanks to my team, and we're going to really keep working hard and dedicated to our mission. Thank you.