ADVA Optical Networking : 2021 6M Report

LETTER TO THE SHAREHOLDERS

Dear shareholders and business associates,

In this half-year report, we publish business figures that fill us with a sense of accomplishment and pride. After a strong first quarter with an exceptionally good pro forma EBIT margin of 8.9%, we were able to deliver growth again in Q2 2021. Revenues rose to EUR 149.4 million and we achieved a pro forma EBIT margin of 9.7%. Additionally, we have further reduced our bank liabilities by EUR 7.5 million and increased our cash by EUR 6.0 million, which further strengthened our balance sheet. ADVA is financially stronger and more successful than ever. Our company is on a clear trajectory of growth with increasing long-term profitability.

Strong demand continues

After a long and exhausting third wave, the number of Covid- 19 infections is decreasing in many regions of the world. Nevertheless, the fear of new mutations and setbacks persists. The state of the world economy is still inconsistent and characterized by great uncertainties. However, with the help of our technology, our customers continue to develop and expand high-performance digital infrastructures. The previous lockdown measures made it clear that companies, industries and regions that had progressed further with their digitization efforts coped much better with the changing conditions, while less digitized business models and processes were often left behind. This realization accelerated digitization efforts in many places, and the willingness to invest in network expansion continued in the past quarter. As such, we see strong incoming orders from all regions and, in terms of technology, the picture is more balanced again. After 2020's recession-related weakening in the demand for cloud access solutions, the strengthening of the real economy has brought new tailwind for this part of our portfolio, resulting in all ADVA technology pillars benefiting from the demand.

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Supply chain complexity still high

While our order books are at record levels, supply chain complexity remains high. In particular, the bottlenecks in the supply of semiconductors is causing enormous stress in purchasing, production and logistics, requiring intense focus and creative solutions. We are fighting hard to secure all the components we need for Q3 2021 and beyond. So far, we have mastered the challenges very well and have largely maintained our ability to deliver. We are in close contact with our customers, who are now placing their orders much earlier than usual, and we are optimistic that the situation will begin easing towards the end of the year.

Business Transformation

In addition, we are making good progress with the transformation of our business model. This transformation, which we presented in March at our capital markets day, is essentially based on three pillars:

• Disproportionate growth in security-relevant networks outside the classic network operator infrastructure
• Increasing sales contributions from software and services
• New markets and cost optimization through verticalization

Our success in the research and education as well as government markets, continued in the past quarter. In Q1 2021, Omdia's industry analysts confirmed that we had a market share of 48% in the EMEA region for these verticals. We expect Q2 2021's results to continue to confirm our current market leadership in the region. In North America, we ranked in the top three suppliers for this segment in the first quarter.

With our Ensemble Activator software, a network operating system for the expansion of 5G networks, we scored two important customer wins. These wins mark the beginning of the commercial introduction of disaggregated cell site gateways by international mobile network operators and are an important milestone for the implementation of open network architectures in 5G.

In terms of verticalization, we see increasing success with our MicroMux portfolio. These pluggable multiplexers are particularly advantageous for manufacturers of switching and routing equipment, as they enable more flexible and efficient use of high-speed interfaces.

Outlook

The macro-environment for our industry continues to be good. The digitization efforts in many global regions are in full swing, and the expansion of communication infrastructure is advancing inexorably. At the same time, the importance of the country of origin in the choice of technology is increasing, and more stringent security requirements in communication networks are changing the global competitive landscape. This de-globalization trend is beneficial for us and strengthens our competitive position, especially in Europe and the US. ADVA has a very credible profile in both regions as a trustworthy supplier of innovative network technology. We are currently expanding our capacities in Europe and America to secure further advantages in an industry that has been consolidating for years. We are making good progress in transforming our business model towards sustainably higher margins.

Our balance sheet is strong, and we have steadily growing financial room for maneuver. The pandemic and the semiconductor crisis will also impact us in the second half of this financial year. Still, we feel certain that we can maintain our ability to deliver with attractive margins if demand continues to be strong. Based on the very good results for the first half of the year and the very promising outlook for the rest of the financial year, we consider a pro forma operating income of less than 7% of revenues as unlikely, hence narrowed the outlook corridor to 7% to 10% for the full year.

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Our industry makes an important contribution to maintaining and safeguarding communication and economic processes. Digitization is one of the key issues in the political and economic discussion. As a European-American supplier, that enjoys the trust of a global and loyal customer base, we are at the center of the action. We will continue to invest all of our energy and creativity in innovative solutions for the benefit of our customers, shareholders and employees.

July 20, 2021

Brian Protiva

Chief executive officer

CONTENTS
Letter to the shareholders......................................................................................................................................................................................	2
IFRS financial highlights 6M 2021 ........................................................................................................................................................................	5
Results of operations, net assets and financial position ................................................................................................................................	6
Business development and operational performance .........................................................................................................................................................................	6
Net assets and financial position ................................................................................................................................................................................................................	9
Events after the balance sheet date.........................................................................................................................................................................................................	11
Risk and opportunity report .......................................................................................................................................................................................................................	11
Outlook .....................................................................................................................................................................................................................	12
Six-month IFRS consolidated financial statements .......................................................................................................................................	13
Consolidated statement of financial position of June 30, 2021 (unaudited)..............................................................................................................................	13
Consolidated income statement for the period from January 1 to June 30, 2021 (unaudited) ...........................................................................................	15
Consolidated statement of comprehensive income (unaudited)...................................................................................................................................................	16
Consolidated cash flow statement (unaudited) ...................................................................................................................................................................................	17
Consolidated statement of changes in stockholders' equity (unaudited)...................................................................................................................................	18
Notes to the condensed interim consolidated financial statements (unaudited).....................................................................................................................	19
Declaration of compliance with the German Corporate Governance Code ...............................................................................................................................	40
Affirmative declaration of the legal representatives...........................................................................................................................................................................	40
Financial calendar...................................................................................................................................................................................................	41
Forward-looking statements ...............................................................................................................................................................................	41
Glossary....................................................................................................................................................................................................................	42
Impressum...............................................................................................................................................................................................................	43

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IFRS FINANCIAL HIGHLIGHTS 6M 2021

Income statement

(in thousands of EUR,
except earnings per share and ratios)	Q2 2021	Q2 2020	Change	6M 2021	6M 2020	Change
Revenues	149,354	145,024	3%	293,827	277,710	6%
Pro forma operating income *)	14,415	10,107	43%	27,275	8,436	223%
Pro forma operating margin in %	9.7%	7.0%	2.7pp	9.3%	3.0%	6.3pp
Operating income	13,036	8,658	51%	24,609	4,620	433%
Operating margin in %	8.7%	6.0%	2.7pp	8.4%	1.7%	6.7pp
Net income	12,001	7,629	57%	23,229	394	n/a
Diluted earnings per share in EUR	0.23	0.15	53%	0.45	0.01	n/a

Cash flow statement

(in thousands of EUR)
	Q2 2021	Q2 2020	Change	6M 2021	6M 2020	Change
Cash flow from operating activities	31,684	37,796	-16%	59,128	49,116	20%
Cash flow from investing activities	-17,127	-14,442	19%	-29,455	-31,941	-8%

Balance sheet and financial ratios

(in thousands of EUR)		Jun. 30,	Dec. 31,
		2021	2020	Change
Liabilities to banks		55,237	62,621	-12%
Lease liabilities according to IFRS		25,910	27,805	-7%
Financial debt		81,147	90,426	-10%
Cash and cash equivalents		85,023	64,881	31%
Net liquidity/ (debt) *)		3,876	-25,545	n/a
Leverage (twelve months rolling) *)		0.5x	0.7x	-29%
Net working capital *)		132,767	129,853	2%
Working capital ratio in %*)		22.4%	23.0%	-0.6pp
Equity		291,685	263,218	11%
Equity ratio in %		53.8%	52.6%	1.2pp
Capital Employed *)		381,383	373,941	2%
ROCE in % *)		13.0%	7.3%	5.7pp

Employees

(at period end)	Jun. 30,	Dec. 31,
	2021	2020	Change
	1,908	1,870	2%

*) The four key performance indicators as well as other ratios are defined in the glossary at the end of this document.

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