Annual report 2017 Connecting, extending and assuring the cloud Contents 1 Welcome 4 4 The ADVA Optical Networking stock 23 Profile 5 Shareholder structure 24 Mission 5 Investor relations review 25 2017 key performance indicators 5 Financial analyst coverage 26 ADVAntages 6 Investor relations contact 26 2017 business highlights 8 5 Business overview 27 2 Management board 12 Mission 28 Members and their backgrounds 13 Technology 28 Letter to shareholders 17 Market, target customers and growth drivers 29 Products 32 3 Supervisory board 19 Regions, sales and marketing 36 Members 20 DevOps 38 Report of the supervisory board 20 Quality management 39 IT strategy 40 Compliance and sustainability 42 2 ADVA Optical Networking – Annual report 2017 6 Combined management report 44 7 IFRS consolidated financial statements 78 Basis of preparation 45 Consolidated statement of financial position 80 Forward-looking statements 45 Consolidated income statement 81 Strategy and control design 46 Consolidated statement of comprehensive income 82 General economic and market conditions 46 Consolidated cash flow statement 83 Business development and operational Consolidated statement of changes in stockholders’ equity 84 performance of the group 47 Notes to the consolidated financial statements 85 Net assets and financial position of the group 53 Notes to the consolidated statement of financial position 104 Performance of ADVA Optical Networking SE 57 Notes to the consolidated income statement 119 Events after the balance sheet date 59 Other disclosures 125 Share capital and shareholder structure 60 Declaration of compliance with the Restriction of voting rights and share transfers 60 German Corporate Governance Code 142 Appointment and dismissal of management board members 60 Affirmative declaration of the legal representatives 143 Changes to articles of association 60 Independent auditor's report 143 Issuance and buy-back of shares 61 Takeover bid-driven change of control provisions 61 8 Additional information 150 Declaration on corporate governance and Quarterly overview 2016-2017 151 corporate governance report 61 Multi-year overview 2007-2017 152 Nonfinancial report 62 Glossary 153 Definition of aims and terms for the rise of the women portion in the supervisory board, the management board and in both Corporate information 158 leadership levels below the management board 62 Financial calendar 2018 159 Remuneration of the management and the supervisory board 62 Employees 64 Risk report 65 Outlook 74 ADVA Optical Networking ­­– Annual report 2017 | 3 1 Welcome We don’t simply ima- gine the future. Through our technology, we’re creating it. Our FSP 3000 OpenFabricTM is a key component of tomorrow’s metro, providing instant scale for rapid innovation cycles. 4 ADVA Optical Networking – Annual report 2017 Profile liver the cloud and mobile services that are vital to today’s society and for imagining new tomorrows. Welcome ADVA Optical Networking is a company founded on innovation and dri- ven to help our customers succeed. Together, we're building a truly connected and sustainable future. Management For over two decades, our technology has empowered networks across board the globe. We’re continually developing breakthrough hardware and Mission software that leads the networking industry and creates new business opportunities. ADVA enables next-generation networks. The group’s mission is to be Supervisory the trusted partner for connecting, extending and assuring the cloud. board It’s these open connectivity solutions that enable our customers to de- 2017 key performance indicators Stock (in millions of EUR, except net promoter score) 60 Business 566.7 56 overview 514.5 30 441.9 40 41 Combined management 23.4 report 339.2 19.5 51.2 310.7 48.9 41.7 21 Financial 8.6 9.5 25.5 statements Additional 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 information Revenues Pro forma Net liquidity Net promoter score (%)2 operating income1 (as of December 31) -38.2 Financial KPIs Non-financial KPI 1 Pro forma operating income is calculated prior to non-cash charges related to the stock compensation programs and amortization and impairment of goodwill and acquisition-related intangible assets. Additionally, non-recurring expenses related to restructuring measures are not included. 2 The Net Promoter Score is obtained by asking customers a single question on a 0 to 10 rating scale: “How likely is it that you would recommend our company to a friend or colleague?” Based on their responses, customers are categorized into one of three groups: promoters (9–10 rating), passives (7–8 rating), and detractors (0–6 rating). The percentage of detractors is then subtracted from the percentage of promoters to obtain a Net Promoter Score. ADVA Optical Networking ­­– Annual report 2017 | 2017 key performance indicators 5 ADVAntages Focus on growth markets Trusted partner Æ ADVA focuses on growth markets in the telecom space that have Æ ADVA’s unique combination of innovation and speed has seen the one thing in common: a strong and sustainable demand for inno- group build close partnerships with customers, resulting in repea- vative connectivity solutions. ted purchases and strong cross-selling opportunities for its inno- vative networking solutions. Æ These markets are driven by the global megatrends “cloud” and “mobility” demanding more and better connectivity in all areas of Æ As a trusted partner for two decades, ADVA provides high-quality the network. solutions with lowest cost of ownership and best user experience. Æ The total addressable market for ADVA was estimated to be USD Æ ADVA is led by a dynamic, international, experienced and highly 13 billion in 2017 and will, according to industry analysts, grow to motivated management team with many years of senior manage- USD 16 billion by 20213. ment background, making it a dependable partner when it comes to building long-term business relationships. 3 Industry analyst estimates for metro and long-haul WDM equipment (“Optical”) and access switching & routing (“Ethernet”) relevant to ADVA Optical Networking. Sources: Ovum, Optical Networks Forecast 2016-2021 published in October 2017 and service provider switching and routing forecast 2016-2022, published in January 2017 6 ADVA Optical Networking – Annual report 2017 Welcome Innovative connectivity solutions Speed for customers Management Æ ADVA’s industry-leading engineering force is exclusively focused Æ ADVA has a strong track record of being first to market with new board on innovative connectivity solutions for cloud and mobile ser- functionality that adds value for customers. vices, outperforming the engineering departments of other ven- dors in this space. Supervisory Æ A responsive team serves customers around the globe, with 50.1% board of ADVA’s 2017 revenues generated in EMEA (Europe, Middle East Æ Focus on innovation drives market success and has made ADVA and Africa), 43.6% in the Americas and 6.3% in Asia-Pacific. the global leader for data center interconnect solutions for private enterprises with a market share of greater than 30%4 and … Stock Æ ADVA’s innovative networking solutions have been deployed by several hundred service providers and thousands of enterprises Æ … on of the top suppliers of metro data center interconnect solu- around the globe. Business tions for internet content providers and carrier neutral providers overview with a market share of 12%4. Combined management report Financial statements Additional information 4 Source: Ovum, market share report 3Q17 for data center interconnect, published in December 2017 ADVA Optical Networking ­­– Annual report 2017 | ADVAntages 7 2017 business highlights Æ Growth in Europe and new customer wins Æ Breakthrough with Ensemble software solutions Æ Acquisition of MRV Communications, Inc. Customer achievements and awards 2017 was a year of mixed success. ADVA Optical Networking’s solutions brought new efficiencies and revenue opportunities to enterprises in all industries. The company’s scalable, highly efficient technology was also deployed in mission-critical service provider networks across every con- tinent. And, with its Ensemble software architecture, ADVA was selected to become a part of Verizon’s universal CPE solution. Here are a few of the highlights from the last 12 months: January 2017 ADVA’s Ensemble Connector wins TMC’s NFV Product of the Year Award Software-based virtualization platform honored in Internet Telephony Awards for openness and simplicity March 2017 Oscilloquartz synchronizes Orange Egypt’s national network Complete timing solution enables next-generation LTE services Exaring deploys ADVA FSP 3000 for unique cloud-based entertainment services Ultra-fast nationwide backbone enables instant access to high-quality TV ADVA introduces direct detect open optical layer for ultimate DCI flexibility Expanded FSP 3000 CloudConnectTM platform now offers customers both complete and disaggregated solutions Dobson Technologies selects ADVA fiber assurance solution in state-wide network ADVA ALM provides real-time, in-service link monitoring for improved performance and streamlined operations April 2017 PSNC deploys ADVA 96-channel 100G core solution in pan-European research network ADVA FSP 3000 with ROADM technology connects Polish supercomputing center to CERN SUNET deploys ADVA’s 100G technology in national research and education network Scalable, open optical line system key to state-of-the-art multi-vendor transport solution May 2017