Capitalizing on Next-Generation Networks. Annual Report 2011

Transcription

1 Capitalizing on Next-Generation Networks Annual Report 2011

2 Welcome Profile ADVA Optical Networking is a global provider of intelligent telecommunications infrastructure solutions. With software-automated Optical+Ethernet transmission technology, the Company builds the foundation for high-speed, next-generation networks. Mission ADVA Optical Networking enables next-generation networks. The Company s mission is to be the trusted partner for innovative Optical+Ethernet transport solutions that ADVANCE next-generation networks for data, storage, voice and video services. The Company s FSP product family adds scalability and intelligence to customers networks while removing complexity and cost. With a flexible and fast-moving organization, ADVA Optical Networking forges close partnerships with its customers to meet growing demand for data, storage, voice and video services. Thanks to reliable performance for more than 15 years, the Company has become a trusted partner for more than 250 carriers and 10,000 enterprises across the globe. 2

3 ADVAntages Welcome Focus on Growth Markets Speed for Customers ADVA Optical Networking focuses on growth markets in the telecom space that have one thing in common: a strong and sustainable demand for Optical+Ethernet transport. These markets are driven by the shift from legacy purpose-built networks to next-generation multi-purpose networks, where Optical+Ethernet technology provides the underlying foundation. Average growth across these markets is expected to be 13% per year between 2010 and 2014 to a total of EUR 6.8 billion in Including the adjacent long-haul WDM and Ethernet switching markets that ADVA Optical Networking will be able to address increasingly over time, the Company s total addressable market is projected to expand to EUR 9.4 billion in Optical+Ethernet Innovation ADVA Optical Networking s industry-leading engineering force is exclusively focused on Optical+Ethernet innovation, outperforming the engineering departments of other vendors in this space. Focus on innovation drives market success and has made ADVA Optical Networking the #1 player worldwide for fiber Ethernet access solutions for five years in a row with a market share of more than 20% 2 and a strong competitor in Europe, Middle East and Africa (EMEA) in the metro optical market with a market share of more than 10%. 3 ADVA Optical Networking has a strong track record of being first to market with new functionality that adds value for customers. A responsive team serves customers around the globe, with 65% of ADVA Optical Networking s 2011 revenues generated in EMEA, 30% in the Americas and 5% in Asia-Pacific. ADVA Optical Networking s Optical+Ethernet solutions have been deployed by more than 250 carriers and 10,000 enterprises. Trusted Partner ADVA Optical Networking s unique combination of innovation and speed has seen the Company build close partnerships with customers, resulting in repeat purchases and strong cross-selling opportunities for its Optical+Ethernet solutions. As a trusted partner for more than 15 years, ADVA Optical Networking provides high-quality solutions with lowest cost of ownership and best user experience. The Company s experienced management team has many years of senior management background in blue-chip telecommunications equipment companies, making it a dependable partner when it comes to building long-term business relationships. 1 Industry analyst estimates for metro WDM equipment ( Optical ) and Ethernet access devices ( Ethernet ) relevant for ADVA Optical Networking. Sources: Infonetics Research Optical Network Hardware, Quarterly Market Share, Size, and Forecasts 2Q11, August 2011, and Infonetics Research Carrier Ethernet Equipment Biannual Market Share, Size and Forecasts 2 nd Edition, November Based on 2010 total revenues for Ethernet access devices. Source: Infonetics Research Carrier Ethernet Equipment Biannual Market Share, Size and Forecasts 2 nd Edition, November Based on 2010 total revenues for metro optical transport equipment. Source: Infonetics Research Optical Network Hardware, Quarterly Market Share, Size, and Forecasts 2Q11, August Supervisory Corporate Governance Stock Investor Relations Business Overview Report Financial Statements Additional Information

4 Contents Welcome 2 Profile 2 Mission 2 ADVAntages Financial Highlights Business Highlights 7 14 Members and Their Backgrounds 15 Letter to Shareholders 18 Business Overview 40 Mission 41 Technology 41 Market and Growth Drivers 41 Products 45 Sales Regions and Customers 48 Sales and Marketing 50 Operations 52 Product Engineering 54 Quality 56 Supervisory 22 Members 23 Report to Shareholders 24 Corporate Governance Report 28 The ADVA Optical Networking Stock 32 Investor Relations Review and Financial Calendar 36 Group Report 58 Forward-Looking Statements 59 General Economic and Market Conditions 59 Business Development and Operational Performance 61 Net Assets and Financial Position 66 Share Capital and Shareholder Structure 71 Restriction of Voting Rights and Share Transfers 72 Appointment and Dismissal of Members 72 Changes to Articles of Association 72 Issuance and Buy-Back of Shares 73 Takeover Bid-Driven Change of Control Provisions 73 Employees and Social Responsibility 74 4

5 Declaration on Corporate Governance 76 Remuneration of and Supervisory s 77 Environmental Responsibility 78 Risk Report 79 Events After the Balance Sheet Date 86 Outlook 87 IFRS Consolidated Financial Statements 90 Consolidated Statement of Financial Position 91 Consolidated Income Statement 92 Consolidated Statement of Comprehensive Income 93 Consolidated Cash Flow Statement 94 Consolidated Statement of Changes in Stockholders Equity 95 Notes to the Consolidated Financial Statements 96 Affirmative Declaration of the 163 Independent Auditor s Opinion 164 ADVAntages at work: Innovation Driving new ideas in an industry that is continually evolving. Turn to pages 22, 28 and 32 to read more about ADVA Optical Networking s innovative network solutions. Speed for Customers Ensuring your data is where you need it, when you need it. Read more about ADVA Optical Networking s commitment to its customers needs on pages 36 and 40. Additional Information 166 Quarterly Overview Multi-Year Overview Glossary 169 Corporate Information 176 Trusted Partner Fostering relationships that help building the network of the future. Turn to pages 58, 90 and 166 to discover how ADVA Optical Networking is working with its customers and partners to enable sustainable growth. 5

6 2011 Financial Highlights 2011 Business Highlights 2011 Financial Highlights (in millions of EUR) Revenues Pro forma operating income (IFRS) * ** ** ** ** Cash and cash equivalents (as of December 31) * 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. ** Numbers exclude one-off non-cash charges (2007) and restructuring charges (2008). 6

7 2011 Business Highlights Welcome Solid revenue growth and sustainable profitability Ongoing innovation leadership, further international expansion and ramped-up technology and distribution partnerships Expansion of addressable market into WDM longhaul and mobile backhauling opportunities Supervisory During 2011, ADVA Optical Networking made the following key announcements: Corporate Governance Customer Achievements February 16: Deployment of ADVA Optical Networking s latest FSP 3000 optical transport solution at PCCW, Hong Kong s premier telecommunications service provider, in order to provide a total of 100Gbit/s connectivity for the APRICOT-APAN (Asia Pacific Regional Internet Conference on Operational Technologies Asia Pacific Advanced Network) event, a prestigious regional Internet summit for the ICT industry that took place in Hong Kong from February 15 to 25, PCCW was appointed the Host Fiber Broadband Service Provider for the conference because of its fiber connectivity leadership, expertise and experience. The PCCW solution also included a 40Gbit/s connection to demonstrate a super-hd video to the conference participants. April 19: ADVA Optical Networking s FSP 3000 solution has been selected by CFN Services in the U.S. to provide industry leading low-latency solutions from Washington, D.C., to the New York / New Jersey trading venues. The availability of this route provides trading firms a competitive advantage when utilizing data sourced from Washington, D.C. Leveraging ADVA Optical Networking s technology, the CFN optical-fiber network will provide the New York / New Jersey financial community the fastest available access to the Washington, D.C., information sources. May 16: LightNet selected ADVA Optical Networking and its partner, Telecom Italia after an evaluation of about 20 vendors and a public tender for their launch of a powerful, flexible and reliable telecommunications infrastructure that delivers its users unprecedented collaboration, medical and scientific capabilities. LightNet is an association of educational and research institutions in Italy s Trieste territory. ADVA Optical Networking s carrier-class, 40Gbit/s DWDM FSP 3000 platform provides them high-speed connectivity and dynamic bandwidth allocation within and among their diverse roster of 10 member institutions, as well as to Italy s and neighboring countries national research and education networks and the commercial Internet. May 16: Lonestar Education and Research Network (LEARN) has deployed ADVA Optical Networking s DWDM FSP 3000 platform to extend its metro solutions in Dallas, San Antonio and Houston, Texas, USA, and has named the FSP 3000 as its platform-of-choice for future network expansion. LEARN is a consortium of K-12, colleges, universities, research, healthcare and public-service institutions in the state of Texas. ADVA Optical Networking s solution serves the campus appetite for commodity Internet access, transmission and delivery of very large research data files and provides the most advanced enterprise services. Stock Investor Relations Business Overview Report Financial Statements Additional Information 7

8 2011 Business Highlights May 25: Indosat has deployed ADVA Optical Networking s FSP 3000 platform to support data center interconnectivity solutions for the Indonesian service provider s banking customers. This platform provides high-capacity DWDM core network connectivity for Indosat s interbank services. The project strengthens the ongoing partnership between Indosat and ADVA Optical Networking and will increase the value for their customers. June 1: Romtelecom has selected ADVA Optical Networking s FSP 3000 agile core transport solution to enable multiple critical networks in Romania, including several countywide rings, a nationwide network throughout the country and an international link connecting Romania and Germany. After an active tendering process, Romtelecom selected the FSP 3000 platform to enable all three infrastructures. The carrier chose this platform because of the FSP 3000 s unique scalability and ability to support the service provider s diverse application needs, including Romtelecom s upcoming introduction of 100Gbit/s services. July 18: U.S.-based Northwest Open Access Network (NoaNet) has selected ADVA Optical Networking s FSP 3000 platform to enable the extension of high-speed broadband service to nearly every underserved area of Washington State. The solution affords NoaNet the long-term, cost-effective scalability to accommodate more users and continue a transition from 10Gbit/s to 40Gbit/s and, eventually, 100Gbit/s services. Finally, it will help NoaNet deliver reliable, high-speed Internet access to schools, libraries, emergency responders, hospitals, government agencies, businesses and individuals in virtually every inhabited location of Washington. July 27: artelis, an alternative communications provider in Luxembourg and Saarland, Germany, has deployed ADVA Optical Networking s FSP 3000 platform in a new backbone infrastructure that effectively unites two separate networks onto one flexible core. Integrated by Nokia Siemens Networks, this new network enables artelis to rapidly respond to its customers needs and provision new services and bandwidth on demand. Including ROADMs and Raman amplification technology, the FSP 3000 solution ensures artelis is able to deliver these services while at the same time reducing operational expenses. August 16: Global Net Access (GNAX), a leading provider of data center services, colocation, cloud computing and managed hosting in the U.S., has deployed ADVA Optical Networking s FSP 3000 platform to upgrade the connection from its AtlantaNAP data center to a Telx interconnection facility. This connection upgrade will provide GNAX s customers with even higher bandwidth access, up to 160Gbit/s, to hundreds of domestic and international carriers, in addition to low-latency connections to financial exchanges and media application providers. The protection and redundancy capabilities of the FSP 3000 platform ensure that GNAX will be able to offer its customers strict service level agreements for mission-critical applications. September 20: TorreyPoint announced that U.S.-based KINBER, the Keystone Initiative for Network Based Education and Research, selected the company to build a stimulus-funded Pennsylvania-wide network using integrated technology from ADVA Optical Networking and Juniper Networks. This fiber optic network represents the foundation of PennREN, the Pennsylvania Research and Education Network, a high-speed fiber broadband network providing 100Mbit/s to 10Gbit/s Ethernet connectivity across the state of Pennsylvania. ADVA Optical Networking s key role is to add scalability and intelligence to networks, while removing the complexity and cost. This was a strong factor in KINBER s decision process, along with ADVA Optical Networking s demonstrated success and strong references in the research & education community. 8

9 October 10: Openreach, the infrastructure division of British Telecom, will use ADVA Optical Networking s FSP 3000 as the foundation for its new Optical Spectrum Access product (OSA) within its Optical Spectrum Services portfolio. Designed to provide enterprises with the high-bandwidth, high-speed and high-availability network connections they need to respond to today s demanding business opportunities, OSA seeks to further strengthen the United Kingdom s position as a global business center. The FSP 3000 platform ensures customers will be able to scale to meet these challenges, deliver a best in class solution and position themselves well within an increasingly competitive global playing field. October 24: ICN, The Iowa Communications Network (ICN), is incorporating its advanced optical transmission equipment in a network upgrade provided by ADVA Optical Networking. ICN s authorized users, which consist of K-12 schools, higher education, healthcare, state and federal government, National Guard armories and libraries throughout Iowa, will have improved access from this equipment upgrade. This network will address high bandwidth demands from the many community anchor institutions of Iowa. With the speed and reliability of fiber optics, Iowans will see educational enhancements, improved technology opportunities, and increased economic development. November 15: The industry s first commercial installation of a high-end parallel sysplex over InfiniBand service in Luxembourg in a joint project of ADVA Optical Networking and P & TLuxembourg. Deployed in a major financial institution s network, the solution provides a fully-secured mainframe business continuity service. By leveraging the strengths of ADVA Optical Networking s FSP 3000 platform, the customer has successfully migrated his parallel sysplex environment connecting two mainframes from a 2Gbit/s FICON-based solution to a higher bandwidth, more sophisticated 5Gbit/s InfiniBand optical connectivity running over a protected, route-diverse physical fiber infrastructure. December 6: Syringa Networks, an Idaho-based regional provider of high-speed fiber optic services in the U.S., has selected ADVA Optical Networking s FSP 3000 platform to provide connectivity throughout its Idaho footprint. Spanning more than 2,500 miles of fiber, Syringa Networks provides high-speed broadband access to southern Idaho and northern Utah businesses. By using the FSP 3000 platform as the cornerstone of its infrastructure, Syringa Networks is able to scale to meet any network demand, whether from private enterprise customers or the public sector. Welcome Supervisory Corporate Governance Stock Investor Relations Business Overview November 8: BCNET, a Canadian not-for-profit organization that runs one of the world s most advanced regional research and education networks, announced the deployment of ADVA Optical Networking s FSP 3000 platform in its highcapacity infrastructure. Connecting over 140 research and higher-education institutions, schools and colleges throughout British Columbia, the diverse path, ring-configuration allows the shared IT services organization to offer leading-edge network services to accelerate research, collaboration and learning. Installed by Charter, one of Canada s fastest-growing integrators, the new network is built on ROADMs providing BCNET with previously unattainable levels of flexibility. Report Financial Statements Additional Information 9

10 2011 Business Highlights New Products and Solutions Innovation February 10: Successful trial of an ADVA Optical Networking direct-detection 100Gbit/s solution in the metro network of a tier-one European carrier. The solution ran error-free under real-life conditions with unfavorable fiber characteristics. The trial demonstrated the potential of non-coherent technologies for low-latency applications in metro and enterprise networks. The demonstration was part of ADVA Optical Networking s engagement in the 100GET metro project, partially funded by the German Ministry of Research and Education (Bundesministerium für Bildung und Forschung). February 28: Addition of a coherent express layer to ADVA Optical Networking s flagship FSP 3000 platform. The new technology has been optimized for 100Gbit/s transmission speed and enables service providers to use optical network resources flexibly and on-demand. Close interworking with the IP / MPLS layer allows a massive increase in network scalability and efficiency. The feature set represents a new generation of agile optical core networks and includes an optical layer that is fully optimized for 100Gbit/s coherent transmission technology, the latest ROADM technology and end-to-end service and bandwidth management. March 21: Release of ADVA Optical Networking s enhanced network operations center (NOC) services as part of the new ADVAcare suite, which presents a combination of operations services, technical support and hardware and software maintenance. NOC services are designed to help protect customers networks and reduce operational expenditure, while freeing internal resources to focus on core business activities. They deliver cost-effective business protection and are provided remotely, with all network-event, quality-of-service and surveillance data securely transported out-of-band between a customer and ADVA Optical Networking. Service-level agreements can be customized for a specific customer s needs. April 12: Availability of ADVA Optical Networking s FSP 150EG-X edge gateway, which delivers cost-effective capacity, scalability and resiliency for Carrier Ethernet access and backhaul networks. The product combines scalability with operational simplicity and enables service providers to migrate toward a universal, Ethernet-centric network architecture below the provider edge. The FSP 150EG-X is a high-capacity, non-blocking edge gateway that provides a central aggregation solution and enables service providers to scale their Carrier Ethernet backhaul offering to address larger applications, while providing a manageable, cost-effective platform that is optimized to deliver intelligent services. 10

11 Welcome September 8: Launch of ADVA Optical Networking s 100G metro solution designed specifically to address the continued fierce bandwidth growth in the metro environment. The new solution is a response to the demands of service providers and enterprises for efficient 100Gbit/s data transport across distances of up to 500km. Fully integrated into the FSP 3000 platform, the 100G metro solution increases the capacity of DWDM networks while lowering cost and reducing space and power consumption. The foundation of the 100G metro solution is in its non-coherent 4x28G technology that enables key efficiencies in cost, space, power and spectral. November 3: Launch of ADVA Optical Networking s FSP 150CC-XG210, an ultra-compact Ethernet service demarcation and aggregation device. The new product enables the delivery of differentiated Ethernet services up to 10Gbit/s with strict service level assurance for carrier and enterprise applications. The FSP 150CC-XG210 has been built from the ground up on Etherjack and Syncjack technology. It is the first product to deliver these two feature suites at 10Gbit/s line speeds and consequently provides unrivalled service monitoring and assurance. Supervisory Corporate Governance Stock Investor Relations Business Overview Report Financial Statements Additional Information 11

12 2011 Business Highlights Interoperability and Alliance Partnerships February 8: ADVA Optical Networking s membership in the Dark Fiber Community (DFC), an online resource for the network operators that build efficient broadband networks and the vendors that support them. Operated by Allied Fiber, the DFC is designed as a networking and educational platform. With currently around 60 members, the DFC was created in response to the rising demands for Allied Fiber s dark-fiber products and services and represents a knowledge portal for the industry, providing data and industry information that is freely accessible to all. March 28: ADVA Optical Networking s participation in the Brocade Developer Program, which will enable enterprise customers to efficiently roll-out next-generation data center technologies between their sites. The cooperation will allow customers to adapt new technologies like 16Gbit/s Fibre Channel and Data Center Bridging much more quickly and with the certainty that all corresponding products deployed will interoperate successfully. Therefore customers can continue to deploy new solutions with confidence. ADVA Optical Networking s lowest-latency, flexible optical networking solutions, combined with Brocade s expertise in data center networking, present the ideal combination to enable the roll-out of traditional disaster recovery and business continuity solutions, as well as next-generation cloud computing architectures. May 11: HEAnet, Juniper Networks and ADVA Optical Networking have successfully demonstrated the automated setup of optical circuits between Juniper Networks routers via an ADVA Optical Networking DWDM optical network, using a common signaling protocol. As another step to delivering the most cost-effective and flexible network solution, this setup allows building an optical circuit without any user intervention beyond the original user commands on the initiating router. As a result, the solution enables improved network utilization, efficiency, performance and scalability to lower the service providers operational expenses. November 10: Successful qualification of ADVA Optical Networking s FSP 3000 platform for the IBM zenterprise Bladecenter Extension. This IBM solution includes zbx and is the new infrastructure for extending System z qualities of service and management capabilities across a set of integrated, fit-for-purpose POWER7 and IBM System x compute elements. The extension is highly relevant for enterprise applications such as business continuity, disaster recovery and cloud computing infrastructure. In these environments low-latency, high-capacity and secure data transmission links between systems are critical. Together with advanced features like high bandwidth physical layer encryption it represents real investment protection for customers who already have ADVA Optical Networking solutions not only in IBM mainframe environments but also in applications like real time stock trading or data replication. 12

13 Company Events Welcome May 16: Appointment of a new member to ADVA Optical Networking s Supervisory. With the retirement of Bernard Bourigeaud from the Supervisory on May 15, his position was filled by Johanna Hey, who was elected by the Company s Annual Shareholders Meeting in Meiningen, Germany, on May 16. Johanna Hey brings extensive international corporate tax law experience to ADVA Optical Networking. October 18: Krish Prabhu steps down from his office as Vice Chairman and as member of ADVA Optical Networking s Supervisory, due to his appointment as President and CEO of AT & T Labs, Inc. earlier in Supervisory Corporate Governance Stock Investor Relations Business Overview Report Financial Statements Additional Information 13

14 14 From left to right: Brian Protiva, Christian Unterberger, Jaswir Singh and Christoph Glingener

15 Members and Their Backgrounds Welcome ADVA Optical Networking is led by a dynamic, international, experienced and highly-motivated team. Leading, directing and managing the Company s growth are four executive officers: Brian Protiva Chief Executive Officer Brian Protiva Chief Executive Officer (CEO) Bachelor of Science in Electrical Engineering, Stanford University, USA Supervisory Christoph Glingener Chief Technology Officer Corporate Governance Christian Unterberger Chief Sales & Marketing Officer Jaswir Singh Chief Financial Officer & Chief Operating Officer Stock Investor Relations Brian Protiva co-founded ADVA Optical Networking in 1994 and, as one of two managing directors, he focused on creating ADVA Optical Networking s marketing, sales and growth strategy. In 2001, Brian was appointed CEO and set in motion the strategies that fuel the Company s success today. Under his leadership, ADVA Optical Networking advanced to become the global market leader in Ethernet access devices and one of the top players in metro Wavelength Division Multiplexing (WDM) worldwide. To date, ADVA Optical Networking s innovative Optical+Ethernet solutions have been deployed at more than 10,000 enterprises and more than 250 carriers around the world. Revenues reached EUR 311 million in 2011, while employment climbed to 1,304 employees at year-end Prior to ADVA Optical Networking, Brian was managing director at AMS Technologies (now the EGORA Group), which he joined in 1987 and where he focused on co-managing its subsidiaries. Business Overview Report Financial Statements Additional Information 15

16 Members and Their Backgrounds Christoph Glingener Chief Technology Officer (CTO) Ph.D. in Electrical Engineering, University of Dortmund, Germany Christian Unterberger Chief Sales & Marketing Officer (CSMO) Diploma in Electrical Engineering (Diplom-Ingenieur), Carinthia University of Applied Sciences, Austria Christoph Glingener joined ADVA Optical Networking in April 2006, assuming responsibility for all global research and development activities at sites in Europe, the United States and China. In 2007, Christoph was appointed CTO. Since that time, he also leads ADVA Optical Networking s product management and advanced technology teams. Christoph has focused on streamlining ADVA Optical Networking s innovative product portfolio, defining the product strategy and building the Company s standing as a global leader in optical networking. Christoph s activities at ADVA Optical Networking build on a long and successful industry career with experience gained in both academic and corporate roles. These include leading positions at Marconi Communications (now Ericsson) and Siemens Communications (now Nokia Siemens Networks). Christian Unterberger joined ADVA Optical Networking in October 2007 to drive corporate sales revenue through a comprehensive and proactive global program, by using his extensive sales experience in the telecommunications industry. Since July 2009, Christian is also charged with determining product positioning and market launch strategies, as well as promoting the Company s global brand identity. Prior to joining ADVA Optical Networking, Christian headed the Service Core and Applications business at Nokia Siemens Networks, where his primary responsibilities included managing the unit s global activities. Before that, he was with Siemens Communications (now Nokia Siemens Networks) for 20 years, where he progressed through the ranks, holding sales and management positions of increasing responsibility, including positions overseeing Europe, Middle East, Africa and Asia-Pacific. He concluded his career at Siemens Communications as president of the company s global Fixed Networks business. 16

17 Jaswir Singh Chief Financial Officer (CFO) & Chief Operating Officer (COO) Welcome Master of Advanced Business Practice, University of South Australia, Australia Master of Accountancy, with Distinction, Charles Sturt University, Australia Bachelor of Commerce, University of Canterbury, New Zealand Member of CPA Australia Jaswir Singh joined ADVA Optical Networking in November 2007 to enable the Company s next growth stage. Since joining the Company, he has worked to solidify ADVA Optical Networking s financial position, including strengthening the balance sheet, improving internal controls and processes to ensure accuracy of financial statements, implementing strategies to manage working capital, improve cash generation, cash flow and net liquidity, and minimizing foreign currency exposure. In early 2009, Jaswir also assumed the COO function, whereby he manages the Company s global manufacturing, supply chain and logistics activities. Additionally, in July 2009, he took over responsibility for the Company s global business systems and information technology activities, and also assumed the role of president of the Company s North American subsidiary, maintaining full legal responsibility for the region. Jaswir has a long and successful background with global telecommunications and high-tech companies, including the North American subsidiary of Nokia; AirDefense (now part of Motorola); and Equant (a division of the France Telecom Group now known as Orange Business Services). Jaswir has more than 20 years experience in senior general management, CFO and operations roles, including managing USD multi-billion enterprises globally. Supervisory Corporate Governance Stock Investor Relations Business Overview Report Financial Statements Additional Information 17

18 Letter to Shareholders Letter to Shareholders Dear shareholders and friends, 2011: Revenue growth to a record high coupled with increased profitability, driven by focus on innovation, operational excellence and target markets with long-term growth potential 2011 was a very challenging year for the global economy. A year marked by economic turmoil caused by debt-laden European countries and natural disasters with Japan being devastated by earthquakes and a tsunami and Thailand coming to a halt due to severe flooding. Nevertheless, ADVA Optical Networking continued to introduce highly innovative networking solutions and to grow revenues. With strategic investments in development activities, we launched new products and software that make it more efficient for our customers to operate their networks and to run their businesses. Despite the poor macro-economic environment, we achieved our goal to grow profitably. ADVA Optical Networking s revenues rose to a record high of EUR million in 2011, up 6.6% compared to Profitability growth was even stronger, with our pro forma operating income increasing by 30% from EUR 13.3 million to EUR 17.3 million, developing positively to 5.6% of revenues in 2011 after 4.6% in the prior year. This sound operational result also fueled our financial strength. At year-end 2011, net liquidity was at an all-time high of EUR 31.2 million, up from EUR 24.7 million at the end of

19 The drivers behind our strong results for 2011 remain unchanged: our relentless focus on innovation, operational excellence and our target markets which continue to show long-term growth potential. Focus on innovation. ADVA Optical Networking continues to develop the most advanced network technology that provides carriers and enterprises with compelling opportunities to shape and enhance their networks and businesses. We drive cost and complexity out of the network by using our software framework to provide our customers with an intelligent, simple and scalable network environment. Major 2011 innovation examples include the addition of an express layer with coherent detection technology to our FSP 3000 platform optimized for long distance 100Gbit/s transmission speed, allowing a massive increase in carrier customers network scalability and efficiency; the launch of a non-coherent, direct detection 100Gbit/s metro solution for our FSP 3000 platform specifically designed for short-reach applications with distances of up to 500km, lowering cost and reducing space and power consumption for carrier customers when compared to coherent solutions; and the new FSP 150EG-X edge gateway, which delivers cost-effective capacity, scalability and resiliency for Carrier Ethernet access and backhaul networks, allowing service providers to migrate towards a universal, Ethernet-centric network architecture. Focus on operational excellence. ADVA Optical Networking has managed to control operational costs despite major incremental investments in its development activities. During 2011, we improved our operational capabilities significantly. Among the key achievements for the year are the global consolidation of purchasing volumes to select alternative suppliers in low-cost regions; the global bundling of transport needs which led to a reduction of freight costs; the reduction of routing times on work orders by 10% at our main production site in Meiningen; the doubling of the number of orders packed per day, due to increased automation; the re-use of packaging material; the improvement of our sales forecast accuracy and related cut of supplier lead times and inventory; the optimization of our electronic manufacturing services (EMS) partner strategy which provides scale and competitive purchasing while utilizing low-cost labor resulting in a significant decrease in cost of assembly; and the introduction of a global trade compliance management system which led to globally standardized supply chain processes for all operations sites, further reducing customer lead times. Welcome Supervisory Corporate Governance Stock Investor Relations Business Overview Report Financial Statements Additional Information 19

20 Letter to Shareholders Focus on growth markets. ADVA Optical Networking s Optical+Ethernet transport solutions have been deployed in a growth market environment for more than 15 years. In 2011, a major driver for this growth was the strong trend towards mobile communication. Devices such as smartphones have become the wallet without which we do not leave our homes. We want to simply use our device whenever and wherever we are, whether it is to look up directions, to share pictures and files while away, or to simply view a YouTube video gone viral. Our devices today address routine tasks allowing us to handle business and payment transactions and connecting us to information that we can store in our pocket at all times. With webbased file hosting services, we can store and share files and folders anywhere. The related growth in mobile traffic needs to be backhauled from the mobile base stations to the carriers central offices, requiring cost-efficient access technology such as ADVA Optical Networking s FSP 150 Ethernet access devices (EADs). While EADs in the past have mainly been used for customer-to-carrier connections, today they are increasingly deployed in mobile backhauling solutions. Another key driver in the demand for our technology is the strong trend towards cloud computing solutions, with owned hardware being replaced by shared-service platforms and many applications being run in the cloud instead of on local hardware. This trend has led to a massive increase in transport capacity demand, fueling growth for our FSP 3000 platform, by carriers and enterprises alike. It is only the combination of our three focus areas outlined above that has made ADVA Optical Networking grow with increasing profitability year-after-year since Significant innovation and our commitment to operational excellence made it possible to turn the major opportunities in our addressable market into sustainable revenue and profitability growth. Looking out to 2012 and beyond, all indications suggest that the market growth trends seen in 2011 will continue or even accelerate. With the latest enhancements of our two hardware platforms FSP 3000 and FSP 150, further development of our FSP management software suite, and the ramp-up of our service offerings, we are also beginning to address opportunities in the WDM long-haul and Ethernet switching markets. These strategic decisions will enable us to address a market totaling USD 9.4 billion in 2014, nearly 40% bigger in size than the market we would be able to address in 2014 without this expansion. 1 Band- 1 Industry analyst estimates for metro WDM equipment ( Optical ) and Ethernet access devices ( Ethernet ) relevant for ADVA Optical Networking. Sources: Infonetics Research Optical Network Hardware, Quarterly Market Share, Size, and Forecasts 2Q11, August 2011, and Infonetics Research Carrier Ethernet Equipment Biannual Market Share, Size and Forecasts 2 nd Edition, November : Increasing profitability due to ongoing market and revenue growth coupled with increasing gross margins and an ongoing focus on innovation and operational excellence 20