Annual report 2020 Open edge networking Disclaimer This printed Annual Report 2020 is dated February 23, 2021 and takes into account the correction of errors identified during the printing process. The disclosure of the relevant parts from this Annual Report together with other documents to be disclosed to the Federal Gazette will take place until end of March 2021. To the extent that these documents are subject to the reporting obligation pursuant to Section 328 (1) sentence 4 of the German Commercial Code (HGB) in the European Single Electronic Format (ESEF) in accordance with Article 3 of Delegated Regulation (EU) 2019/8152, no changes have been taken into account after February 18, 2021. We would like to point out that the officially disclosed documents represent the authoritative version. Contents ADVA OVERVIEW 5 COMBINED MANAGEMENT REPORT 39 Welcome 6 Basis of preparation 40 Profile 6 Forward-looking statements 40 Mission 6 Strategy and control design 40 2020 key performance indicators 6 General economic and market conditions 40 ADVAntages 7 Business development and Operational performance Worldwide presence 8 of the group 42 2020 business highlights 10 Net assets and financial position of the group 46 Performance of ADVA Optical Networking SE 50 Management board 13 Events after the balance sheet date 52 Members and their backgrounds 13 Disclosures under takeover law in accordance with Letter to shareholders 16 Section § 289a (1) HGB and Section § 315a (1) HGB 52 Supervisory board 20 Remuneration of the management and the supervisory board 54 Members 20 Employees 56 Report of the supervisory board 20 Risk and opportunity report 57 ADVA stock 22 Outlook 68 Declaration on corporate governance 70 Stock information 23 Shareholder structure 23 IFRS CONSOLIDATED FINANCIAL STATEMENTS 73 Price development 2020 comparison 23 Consolidated statement of financial position as of Investor relations review 24 December 31, 2020 74 Financial analyst coverage 24 Consolidated income statement for the period Business overview 25 January 1 to December 31, 2020 76 Technology 25 Consolidated statement of comprehensive income 77 Market, target customers and growth drivers 26 Consolidated cash flow statement 78 Products 29 Consolidated statement of changes in stockholders’ equity 80 Regions, sales and marketing 31 Notes to the consolidated financial statements 82 DevOps 32 Notes to the consolidated statement of financial position 97 Quality management 34 Notes to the consolidated income statement 116 IT strategy 35 Other disclosures 121 Compliance and sustainability 36 Declaration of compliance with the German Corporate Governance Code 139 Affirmative declaration of the legal representatives 139 “Independent auditor’s report 140 ADDITIONAL INFORMATION 147 Quarterly overview 2019 – 2020 148 Multi-year overview 2010 – 2020 150 Glossary 154 Corporate information 159 Financial calendar 2021 159 ADVA overview ADVA overview Welcome Welcome PROFILE MISSION ADVA is a company founded on innovation and driven to help ADVA enables open next-generation networks. The group’s our customers succeed. mission is to be an innovation leader focused on its customers’ experience by building better networking solutions. Our technology is the foundation of a shared digital future and empowers networks across the globe. We’re continually developing breakthrough hardware and software that leads the networking industry and creates new business opportunities. It’s these open connectivity solutions that enable our customers to deliver the cloud and mobile services that are The ADVA FSP 3000 TeraFlex™ vital to today’s society and for imagining new tomorrows. unlocks the full potential of our Together, we’re building a truly connected and sustainable future. network. Now we can meet rapidly rising data demand.“ Glossary: page 154 Sergey Petukhin, Head of connectivity infrastructure, Serverius 2020 KEY PERFORMANCE INDICATORS (in millions of EUR, except net promoter score) 566.7 565.0 33.8 60 556.8 56 52 50 24.8 61.1 44 23.4 23.3 19.5 514.5 38.2 502.0 26.8 25.5 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Revenues Pro forma Net promoter score (%) operating income -25.5 Net debt (as of December 31) Glossary: page 154 6 ADVA ­­– Annual report 2020 ADVA overview Welcome ADVANTAGES Innovation leadership in growth markets Technology alignment with future trends y ADVA focuses on growth markets in the telecom space y The global megatrends of cloud and mobility, home that have one thing in common: a strong and sustainable office and mobile working, industrial applications and demand for innovative connectivity solutions. These the expansion of 5G are accelerating the demand for markets are being driven by the digitalization of society and more bandwidth, requiring more flexible provision of its ecosystems. telecommunications services and more precise network synchronization. y The market for telecommunications equipment is in a state of upheaval. The tension between high development y ADVA’s solutions are well-aligned with the current expenditure and fierce competition has put pressure on transformation of networks and have high strategic network equipment suppliers, and only a few providers have relevance for the path to a digital future. The addressable been able to hold their own. Market players with insufficient market for ADVA is expanding sustainably and was innovative strength or loss-making business models have approximately USD 16 billion in 2020. According to estimates largely disappeared. by industry analysts*, it will grow to USD 17 billion by 2024. What’s more, this does not take into account the potential y ADVA’s combination of innovative strength and customer additional opportunities that may arise due to a withdrawal focus, as well as its sustainably profitable business model, of Asian manufacturers (especially Huawei) from Europe. make it unique in the industry. The company is emerging from many years of market consolidation as a clear y ADVA’s focus on innovation has led to market success winner and is extremely well-positioned technologically in and made it the global leader in optical transmission numerous promising markets. technology for data center interconnect networks for large enterprises, with a market share** of over 30%. This Focus on data security and mission critical market has always been considered security-sensitive. The infrastructure market share in EMEA is now over 50%. Furthermore, ADVA is the market leader in Europe for Carrier Ethernetaccess y The Covid-19 pandemic has greatly changed the way we solutions*** (cloud access) with a 47% share, and look at the importance of network infrastructure. Politicians number two worldwide in this segment (22%). In network and business leaders now recognize that high-performance synchronization technology, the company is a technology communications infrastructure is vital for the survival of leader and is currently rapidly gaining market share with national economies and companies in this age of home growth rates of more than 20% (2017-2020: CAGR 23%). offices, video conferencing and virtual collaboration. y In this context, the criteria for selecting network equipment Open corporate culture with a solid business providers have changed, and security and trust have become model tremendously important. This, together with increased y ADVA’s corporate culture is open, transparent and designed security concerns, has led to numerous manufacturers for honest collaboration. A unique combination of being pushed back from Western networks – particularly innovative strength, customer focus and speed in delivering manufacturers from the Far East. In Europe, the old “Made in technological value has enabled ADVA to build close and Germany” seal of quality is experiencing a renaissance. trusting customer relationships. y ADVA is the leading specialist for optical transmission y The company has growing financial room for maneuver technology in Europe with excellent solutions in the field and an extremely solid balance sheet. The viability, of secure data transmission. The company is the only reliability and longevity of ADVA’s business model is highly manufacturer worldwide to offer technology with data rates valued by customers and investors, especially in times of of 100Gbit/s that has been approved by the German Federal macroeconomic uncertainty. Ministry for Information Security (BSI) for the transmission of highly confidential information. Both ADVA’s technology y For more than two decades, ADVA has been a reliable and the company profile itself have a very strong global partner, providing solutions with high quality, lowest reputation in security-relevant application scenarios. possible total cost of ownership and highest possible ease of use. The company’s innovative solutions are used by several hundred network operators and thousands of companies worldwide. * Omdia, “Optical networks forecast”, published July 2020 and “Service provider switching and routing forecast”, September 2020 ** Omdia, “Market share data center interconnect 3Q20”, published November 2020 *** Omdia, “Market share service provider access switching and Ethernet demarcation, 2Q20”, published in August 2020 Glossary: page 154 ADVA ­­– Annual report 2020 7 ADVA overview Welcome WORLDWIDE PRESENCE ADVA is an innovation leader in several key technologies with strong focus on customer experience. The proximity to customers is ensured by numerous sites around the world. Americas: 410