Cherry SE publishes results for the third quarter and first nine months of 2023 and repositions Components business unit to increase profitability

Munich, November 15, 2023 – Cherry SE [ISIN: DE000A3CRRN9] today published its interim report for the third quarter and the first nine months of 2023 and confirmed the preliminary figures as well as the outlook for the current fiscal year, which was specified on October 24, 2023.

“The major relevance of our peripherals product portfolio for office and gaming applications has already proven itself as part of our internationalization strategy in the core markets and is ensuring continued profitable growth. In addition, we are ideally positioned for the growing momentum in the digitalization of the German healthcare system with our e-health terminals and PIN pads and will continue to increase the installed base. In contrast, the keyboard switch business has not recovered as originally assumed. We will place this business on a new, healthy, and sustainably profitable footing with a comprehensive package of measures that impact the entire value chain,” said Oliver Kaltner, CEO of Cherry SE, commenting on Cherry’s business performance. “In this context, our Auerbach and Zhuhai sites will be expanded to become global innovation centers, thereby underlining our commitment to market relevance, innovation leadership, product quality, volume solutions at every scale, pricing expertise, and profitability.”

“With our specified outlook for the current fiscal year, we are compensating for the negative impact on earnings from the Components business unit, which is expected to be around EUR 10 million, through the profitability of the other business units,” adds Mathias Dähn, CFO of Cherry SE. “By repositioning the Components business, we are tapping into annual savings and earnings improvement potential of around EUR 10 to 15 million for the future.”

Group revenue for the first nine months of the current fiscal year amounted to EUR 88.6 million (9M/2022: EUR 98.0 million). The performance resulted in an adjusted positive EBITDA of EUR 1.9 million (9M/2022: EUR 13.6 million) and an adjusted EBITDA margin of 2.2% (9M/2022: 13.9%).

The PROFESSIONAL business area's share of total revenue increased to 67.8% (9M/2022: 62.4%), while the GAMING business area's share decreased correspondingly to 32.2% (9M/2022: 37.6%).

The business performance of the Cherry Group’s various business units varied greatly over the course of the year. In the office and gaming peripherals line of business, we were able to record double-digit growth and increase our market share over the course of the year on the back of an impressive product portfolio, a rigorous strategy of internationalization, and optimized sales management, despite an overall decline in consumer demand. 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.

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. 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 nine months of the current fiscal year, revenue decreased by a further 48.2% and the upswing in demand originally expected for the second half of 2023 did not materialize. Despite taking targeted countermeasures as part of our Group-wide operational excellence strategy, the Components business unit generated an unplanned operating loss of around EUR 8 million (EBITDA) in the first nine months of the current fiscal year.

The GAMING business area generated revenue of EUR 28.5 million (9M/2022: EUR 31.5 million) in the first nine months of the current fiscal year. Adjusted EBITDA amounted to a negative EUR -1.9 million (9M/2022: positive EUR 1.1 million), with an adjusted EBITDA margin of -6.7% (9M/2022: 3.6%). The operating loss for the business area is attributable to the Components business unit, the revenue of which fell by 48.2% year on year to EUR 8.5 million (9M/2022: EUR 16.4 million).

As part of the strategic realignment and restructuring of the business unit, inventories of discontinued Cherry MX1 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.

With revenue of EUR 19.9 million, the Gaming Devices business unit also performed better than in the same period one year earlier (9M/2022: EUR 15.1 million). Growth was mainly due to the acquisition of the Swedish e-sports specialist "XTRFY" in January of the current fiscal year, the products of which complement the Cherry portfolio and are now being offered and sold on the market under the new joint premium brand "CHERRY XTRFY".

The PROFESSIONAL business area generated revenue of EUR 60.1 million (9M/2022: EUR 52.3 million) in the first nine months of the current fiscal year. Adjusted EBITDA amounted to EUR 3.9 million (9M/2022: EUR 9.5 million), with an adjusted EBITDA margin of 6.4% (9M/2022: 18.2%).

Business with peripherals for office and industry applications within the Peripherals business unit developed extremely well. Revenue grew by 32.8% to EUR 47.4 million compared to the previous year (9M/2022: EUR 35.7 million). Taking into account revenue generated with security devices for the months from April to September 2023 (EUR 2.8 million), which was allocated to the Digital Health & Solutions business unit from the second quarter onwards and was still included in the Peripherals business unit in the previous year, actual revenue growth was as much as 40.6% year on year.

The Digital Health & Solutions business unit continued to be impacted by customer reluctance to purchase our e-health terminals. At EUR 12.7 million, nine-month revenue recorded for the business unit was 23.5% down on the previous year (9M/2022: EUR 16.6 million). The figure includes revenue of EUR 2.8 million for Security Devices, which has been allocated to the Digital Health & Solutions business unit since the beginning of the second quarter 2023 and was previously allocated to the Peripherals business unit.

The main reasons 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, 2023, which will become mandatory at the turn of the year, and the planned mandatory introduction of the electronic patient record by the end of 2024, demand for e-health terminals was expected to increase in the third quarter. However, 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 was also changed from reimbursement of the initial equipment costs to a monthly TI flat rate on July 1, has contributed to the general reluctance to purchase.

Business with hygienic and washable input devices benefited from a strong product portfolio and a growing international market environment. The Security Devices business also grew by around 4.0% year on year.

The gross profit of EUR 23.0 million generated in the first nine months of 2023 was EUR 8.3 million down on the previous year’s figure (9M/2022: EUR 31.3 million). Around EUR 3.0 million of the decline resulted from the EUR 9.4 million decrease in revenue. The remaining shortfall of EUR 5.3 million was due to a lower gross margin, which shrank by 6.0 percentage points to 25.9% year on year (9M/2022: 31.9%). The main reasons for the downward trend were the impairment loss recognized on the Cherry MX1 switches of approximately EUR 2.8 million, idle capacity costs in production, and unfavorable product mix effects. Furthermore, the prior year period included a positive exceptional impact of EUR 2.3 million arising on the change in estimates of obsolescence write-downs recognized in conjunction with the valuation of inventories.

In the first nine months of the current fiscal year, a total of EUR 5.0 million was adjusted for non-operating exceptional effects. Of this amount, EUR 2.8 million was attributable to the impairment loss recognized on Cherry MX1 switches as part of the announced restructuring of the Components business unit, EUR 1.3 million to expenses in conjunction with personnel changes at Management Board level (CEO and CFO), and EUR 0.3 million for expenses in conjunction with M&A activities.

The Cherry Group's total assets as of September 30, 2023 amounted to EUR 353.6 million and decreased by EUR 25.5 million during the nine-month period under report (December 31, 2022: EUR 379.1 million).

Current assets amounted to EUR 144.6 million and were therefore EUR 32.2 million below the figure recorded as of December 31, 2022 (EUR 176.8 million). The main reason for the lower figure was a EUR 48.5 million reduction in cash and cash equivalents to EUR 44.4 million, primarily resulting from cash flows from operating activities (negative EUR -31.8 million).

The negative cash flow was mainly attributable to the increase in net working capital (NWC), comprising the net amount of current assets (excluding cash and cash equivalents) and current liabilities (excluding financial debt). NWC rose by around 67.2% from EUR 40.9 million to EUR 68.4 million during the reporting period, primarily due to the further increase in inventories by EUR 10.8 million, the rise in current trade receivables by EUR 5.2 million and the reduction in current trade payables by EUR 11.4 million. The deterioration compared to the same period of the previous year was driven by the higher increase in net working capital, which went up by EUR 15.8 million during the period under report. Moreover, the loss for the nine-month period (EUR -12.7 million) represented a EUR 12.0 million deterioration on the previous year (9M/2022: EUR -0.7 million). However, cash flows from operating activities continued to improve sequentially to EUR -5.2 million in the third quarter (Q2/2023: EUR -8.7 million; Q1/2023: EUR -17.8 million).

Current business developments are making it increasingly challenging to achieve the targets we originally set ourselves for the 2023 fiscal year. However, based on updated planning for the fourth quarter, the Management Board of Cherry SE expects to end the year in line with the original forecast, albeit at the lower end of the initially targeted range. The unplanned operating loss in the Components business unit, which is expected to be in the region of EUR 10 million (adjusted EBITDA) by the end of the year, should be largely compensated by profits generated with the office and gaming peripherals line of business.

In this context, on October 24, 2023 Cherry SE drew up a more precise outlook for the current fiscal year which was made public in the form of an inside information notification pursuant to Article 17 MAR. Accordingly, the Management Board now expects Group revenue to total approximately EUR 140 million (previously: between EUR 135 million and EUR 165 million) with an adjusted EBITDA margin of around 10% (previously: 10% to 14%) for the 2023 fiscal year.

The Cherry Group as a whole aims to return to an adjusted EBITDA margin of over 20% in the medium term.

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The interim report, together with the unaudited condensed consolidated financial statements of Cherry SE as of September 30, 2023, in accordance with IFRS are available on the Cherry website at https://ir.cherry.de.

About Cherry

Cherry SE [ISIN: DE000A3CRRN9] is a globally operating manufacturer of high-end mechanical keyboard switches and computer input devices such as keyboards, mice, and headsets for applications in the worlds of gaming, e-sports, office and hybrid workplaces, industry, and healthcare. Since it was founded in 1953, Cherry has been synonymous with innovative, high-quality products developed specifically to meet the various needs of its customers.

Cherry has its operational headquarters in Auerbach in Germany's Upper Palatinate region and operates production facilities in Auerbach, Zhuhai (China), and Vienna (Austria) as well as various sales offices in Auerbach, Pegnitz, Munich, Landskrona (Sweden), Paris, Kenosha (USA), Taipei, and Hong Kong.

More information is available online at: https://cherry.de/

Contact:

Dr. Kai Holtmann

Investor Relations

Rosental 7, c/o Mindspace, 80331 Munich, Germany

Postal address: Cherrystrasse 2, 91275 Auerbach, Germany

T +49 (0)175-1971503

F +49 (0)9643 20 61-900

E-mail: [email protected]