Adtran : Annual report 2023, including consolidated financial statements, combined management report and the report of the Supervisory Board

Unlocking the future network

ANNUAL REPORT 2023

Contents

Welcome	3
Combined	4
management report
Basis of preparation	5
Forward-looking statements	5
Strategy and control design	6
General economic and market conditions	7
Business development and operational performance of the group	9
Net assets and financial position of the group	15
Performance of Adtran Networks SE	20
Events after the balance sheet date	22
Disclosures under takeover law in accordance with Section § 289a (1) HGB and Section § 315a (1)	22
HGB
Employees	25
Risk and opportunity report	26
Outlook	38
Declaration on corporate governance	40
IFRS consolidated	41
financial statement
Consolidated statements of financial position as of December 31, 2023	42
Consolidated income statements for the financial year	44
January 1 to December 31, 2023
Consolidated statements of comprehensive income	45
Consolidated cash flow statements	46
Consolidated statement of changes in stockholders' equity	48
Notes to the consolidated financial statements	50
Notes to the consolidated statement of financial position	69
Notes to the consolidated income statement	88
Other disclosures	95
Declaration of compliance with the German Corporate Governance Code	119
Affirmative declaration of the legal representatives	119
Independant auditor's report	120
Additional information	126
Report of the supervisory board	127
Quarterly overview 2022 - 2023	130
Corporate information	132
Financial calendar 2024	133

• Adtran Networks - Annual report 2023

Welcome

Profile

Adtran Networks is a company founded on innovation and driven to help our customers succeed.

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 cloud1 and mobile services that are vital to today's society and for imagining new tomorrows.

Together, we're building a truly connected and sustainable future.

Mission

Adtran Networks enables open next-generation networks. The group's mission is to be an innovation leader focused on its customers' experience by building better networking solutions.

2023 key performance indicators

(in millions of EUR, except net promoter score2)

• Cloud in the context of IT describes a concept where applications no longer run on the user's in-house IT infrastructure (for example, a server) but are outsourced to a service provider whose IT infrastructure is not visible or known in detail - as if it was hidden in a cloud. A typical example is the use of software as a service, where the software is not stored on the user's machine, but on servers of the software service provider.
  2 The NPS 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.
  3 Pro forma EBIT 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 M&A and restructuring measures are not included.
  4 Net cash is calculated by subtracting total financial liabilities from cash and cash equivalents. Total financial liabilities comprise current and non-current financial liabilities to banks, including factoring agreements, as well as current and non-current financial receivables and liabilities to Adtran Holdings Inc., including receivables and liabilities from the domination and profit and loss transfer agreement and current and non-current lease liabilities in accordance with IFRS 16 Leases. A negative calculation result is referred to as net debt.

Adtran Networks - Annual report 2023 3

Combined management report

Combined management report

Disclaimer:

Potential inconsistencies in the table values are based on rounding differences.

• Adtran Networks - Annual report 2023

Combined management report

Basis of preparation

Following the resolution of the annual shareholder's meeting on May 24, 2023, ADVA Optical Networking SE was renamed to Adtran Networks SE with effect from June 8, 2023.

This report combines the group management report of Adtran Networks group ("the group", "Adtran Networks"), comprising Adtran Networks SE (hereafter also referred to as "the company", "Adtran Networks SE") and its consolidated subsidiaries, and the management report of Adtran Networks SE.

The combined management report of Adtran Networks SE was prepared in accordance with sections 289, 315 and 315e of the German Commercial Code (Handelsgesetzbuch, HGB) and German Accounting Standards (Deutsche Rechnungslegungsstandards) No. 17 and 20 (DRS 17 and 20).

All information contained in this report relates to the status on December 31, 2023, or the financial year ending on that date, unless stated otherwise.

The German Corporate Governance Code provides for disclosures on the internal control and risk management system that go beyond the statutory requirements for the management report and are therefore excluded from the auditor's review of the content of the management report ("non-management report disclosures"). These are classified further to risk management and are explained in more detail in the chapter "risk and opportunities report".

Due to rounding, figures in tables may not add up exactly to the totals shown and percentages shown may not exactly reflect the absolute figures to which they relate.

Forward-looking statements

The combined management report of Adtran Networks SE contains forward-looking statements using words such as "believes", "anticipates" and "expects" to describe expected revenues, costs and earnings, anticipated demand for optical networking solutions and anticipated liquidity from which internal estimates may be inferred. These forward-looking statements are based on the beliefs of the Management Board and respective assumptions made, and involve a number of unknown risks, uncertainties and other factors, many of which are beyond Adtran Networks' control. If one or more of these uncertainties or risks materializes, or if the underlying assumptions of the Management Board prove incorrect, actual results can differ materially from those described in or inferred from forward-looking statements and information. Unknown risks and uncertainties are discussed in the "risk and opportunity report" section further below.

Adtran Networks - Annual report 2023 5

Combined management report

Strategy and control design

Adtran Networks strategic goals are focused on growth and profitability, innovation, operational excellence, customer experience and people. The strategic goals are reviewed by both the management board and the supervisory board on a yearly basis and amended where appropriate. Each of these goals are defined in detail and then broken down into specific departmental and individual targets. The strategic goals are traced to each individual employee so that each employee can focus and be evaluated on his/her individual performance and contribution to Adtran Networks overall performance.

Adtran Networks measures the accomplishment of its strategic goals against revenues, pro forma EBIT1, net cash2 and as a non-financial criterion customer experience measured by the net promoter score. These metrics represent the group's key performance indicators. The management board sets target values for all four metrics for the coming year and measures actual values against the target values on a monthly basis for revenues and pro forma EBIT, on a quarterly basis for net cash and on a yearly basis for the net promoter score. In case of deviations from plan, corrective action can be taken quickly. This information is summarized and communicated to the management board in monthly, quarterly and yearly reports. There are no separate key performance indicators and corresponding forecast values for Adtran Networks SE.

Adtran Networks had presented its business transformation strategy in the first quarter of 2021. This strategy aims to sustainably improve the margin profile of Adtran Networks's business model and is essentially based on the following three pillars:

• Increase revenues outside of the traditional communication service provider space to 40 % by the end of 2023.
• Increase revenue contribution from the areas of software and services to 30 % by the end of 2023.
• Access new markets and revenue contribution, as well as cost reduction from increased verticalization activities, from the development and production of optoelectronic components.

These pillars will continue to be an essential part of the group's strategy in 2024.

Following the registration of the domination and profit and loss transfer agreement with Adtran Holdings, Inc. on January 16, 2023, Adtran Networks has aligned its strategic objectives with the objectives of the Group as a whole. Due to the significantly expanded product portfolio and additional markets and applications, the objectives of the business transformation strategy were no longer relevant after January 16, 2023. However, the key performance indicators for managing the Adtran Networks group continue to be revenue, pro forma EBIT, net cash and customer satisfaction.

In addition, management at the highest group level of Adtran Holdings is based on revenues and adjusted EBIT3 for the Adtran Holdings group as a whole. These key figures are important indicators for the Adtran Networks Group. In the 2023 financial year, the Adtran Holdings Group reports revenues of USD 1,149.1 million and an adjusted EBIT of negative USD 9.9 million.

There are no differences in the definition of revenues for the Adtran Networks subgroup compared to US GAAP. The definition of adjusted EBIT differs only insignificantly from the calculation of pro forma EBIT with regard to the reconciliation items.

This annual report continues to report on the previous key performance indicators.

• Pro forma EBIT 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 M&A and restructuring measures are not included.
  2 Net cash is calculated by subtracting total financial liabilities from cash and cash equivalents. Total financial liabilities comprise current and non-current financial liabilities to banks, including factoring agreements, as well as current and non-current financial receivables and liabilities to Adtran Holdings Inc., including receivables and liabilities from the domination and profit and loss transfer agreement and current and non-current lease liabilities in accordance with IFRS 16 Leases. A negative calculation result is referred to as net debt.
  3 Adjusted EBIT is defined as the Adtran Holdings group earnings before interest and tax, determined based on the audited financial results, and adjusted to remove any restructuring expenses; acquisition-related expenses and amortization of intangibles; stock-based compensation expense; the non-cash change in fair value of equity investments held in the deferred compensation plan; and any other non-GAAP exclusions approved by the compensation committee of Adtran Holidngs, Inc..

• Adtran Networks - Annual report 2023

Combined management report

General economic and market conditions

The global economy at the beginning of 2024

In its latest World Economic Outlook (WEO), the International Monetary Fund (IMF) updated its forecasts for changes in the economic performance of nations and regions and increased the majority of these compared with the last forecast from October

2023. The January 2024 World Economic Outlook estimates the state of the global economy as follows:

Global growth is expected to remain at the same level as the estimated 3.1 % in 2023. In October, the IMF was still forecasting growth of 3.0 %. For the USA, the IMF forecasts growth of 2.1 % compared to 2.5 % in 2023. The eurozone is expected to grow by 0.9 % compared to an estimated 0.5 % in the previous year. For Germany, the IMF forecasts economic growth of 0.5 % compared to the estimated recession of 0.3 % in 2023.

The fiscal policy efforts of global central banks to combat inflation and the associated interest rate hikes will continue to weigh on global economic growth in 2024. However, economic experts believe that inflation will fall faster than expected in most regions. Overall global inflation is expected to fall to 5.8 % in 2024 and to 4.4 % in 2025, although the forecast for 2025 has been revised downwards by the IMF. Given the slowdown in inflation and steady growth, the likelihood of a severe economic crisis has receded and the risks to global growth are largely balanced. On the other hand, a faster decline in inflation could lead to a further loosening of fiscal policy.

This view is shared by the majority of economic experts in the USA and also by the US Federal Reserve. In its first decision of the year, the FOMC unanimously kept interest rates in a target range of 5.25 % to 5.50 %. It was signaled that the FOMC had moved away from its previous tendency to raise interest rates. However, the committee indicated that it is not yet ready to cut interest rates at the next meeting in March 2024 and stated that greater confidence must first be gained that inflation will move towards 2% on a sustained basis.

With regard to Germany and the eurozone, experts do not yet see any loosening of fiscal policy in the short term. The inflation rate in the eurozone fell further from 2.9 % in December 2023 to 2.8 % in January 2024. However, this decline is due in particular to falling energy and food and beverage prices, while an inflationary process can be seen in the services sector. Economic experts therefore assume that the ECB will not cut the key interest rate until June 2024 at the earliest.

During the pandemic, the relevance of an efficient telecommunications infrastructure has once again become clear. However, after record quarters in Q1 and Q2 2023, sentiment in the optical transport technology sector has deteriorated. The major telecommunications providers in particular had built up large inventories and are now postponing infrastructure projects into the future, as the macroeconomic environment and the significant interest rate increases are weighing on the financial profile of these companies. Management currently assumes that our customers' investment behavior will not improve noticeably until the second half of 2024 at the earliest.

Market environment for Adtran Networks

The addressable market for Adtran Networks is determined by the digitization of ecosystems and the resulting increasing demand for cloud4-based solutions and underlying communication networks. The rapid adoption of digital processes in all industrial sectors, the creation and use of artificial intelligence and the ubiquitous consumption of high-resolution videos via mobile and fixed networks are important and sustainable growth drivers for the market. Recent developments such as the increased use of home office, home schooling and video conferencing are sustainable accelerating investments in the increasing network expansion. State stimulus and support programs create an additional positive dynamic.

For many years, the communications network supplier industry was characterized by a tension between high development costs and tough competition. This has led to strong selection among manufacturers, and only a few suppliers have been able to hold their own. Market participants with insufficient innovation power or loss-making business models have now largely disappeared from the scene. This has led to market upheaval. In addition, the Covid-19 pandemic has changed perspectives on the importance of network infrastructure. Politics and business have recognized the importance to companies and economies of an efficient communication infrastructure for digital cooperation and virtual collaboration. We are also experiencing security and trust becoming increasingly important in the market environment. As a result of increased security concerns, numerous manufacturers from the Far East are currently being pushed back from the western networks.

In recent years, Adtran Networks has consistently invested in the development of innovative solutions and has brought excellent solutions in the field of secure data transmission to the market. Adtran Networksʼs network technology enables the construction of a high-performance communication infrastructure that serves as the basis for the digital economy, the industrial internet of things (industrial IoT5) - often referred to as Industry 4.0 in Germany - and the digitization of ecosystems. The company addresses important applications in this growth market. Fiber optic transmission technology delivers scalable bandwidth for

• Cloud in the context of IT describes a concept where applications no longer run on the user's in-house IT infrastructure (for example, a server) but are outsourced to a service provider whose IT infrastructure is not visible or known in detail - as if it was hidden in a cloud. A typical example is the use of software as a service, where the software is not stored on the user's machine, but on servers of the software service provider.
  5 Network of devices such as vehicles and home appliances that contain electronics, software, sensors, actuators, and connectivity which allows these things to connect, interact and exchange data.

Adtran Networks - Annual report 2023 7

Combined management report

network operatorsʼ infrastructure and the data center interconnect (DCI6) networks of large enterprises and internet content providers7. In the access area of the networks (network edge8), the new technology with virtualization enables fast and flexible provision of cloud services and new possibilities for creating edge computing solutions. In addition, the company's synchronization technology provides timing information that is of the utmost importance when building broadband 5G mobile networks, globally distributed data centers and for energy suppliers.

Adtran Networks is well positioned in several areas of the WDM9 market, the core segment of the overall optical networking hardware market. The adjacent market for Ethernet10-based network access solutions is gaining new momentum with the introduction of virtualized network features. Here, the companyʼs solutions can address more and more new growth applications and open up additional opportunities. Finally, Adtran Networks provides differentiated network synchronization solutions for mobile networks and expands the feature set of its portfolio to address timing requirements for other industries, particularly critical infrastractrue. The total addressable market for Adtran Networks is estimated to be USD 10.8 billion11 in 2023, growing to USD 12.1 billion by 2028 while the possible additional opportunities resulting from the shift from Asian suppliers (especially Huawei) to European suppliers are not quantified (see also the chapter "market, target customers and growth drivers").

• Network that connects geographically dispersed data centers.

• Internet content providers are entities whose primary business is the creation, storage and dissemination of digital information. ICPs are also commonly referred to as over-the-top (OTT), web 2.0 and digital media companies.
  8 This term is often used for the area of the network infrastructure where the data streams from the end users' access lines converge. These data streams are often bundled at the network edge and functions are defined for the end customer.
  9 WDM expands the capacity of networks by allowing a greater number of signals to be transmitted over a single fiber. WDM enables numerous channels of data to be multiplexed into unique color bands, and then to be combined and transmitted over a single fiber and de-multiplexed at the other end.
  10 Ethernet is a packet-based data transmission protocol with a data rate of 10Mbit/s. Fast Ethernet provides a data rate of 100Mbit/s, Gigabit Ethernet 1Gbit/s and 10 Gigabit Ethernet 10Gbit/s. Today also 40, 100 and 400 Gigabit Ethernet solutions are commercially available with data rates of 40Gbit/s, 100Gbit/s and 400Gbit/s, respectively.
  11 World market excluding China for Metro and Backbone WDM (Omdia, "Optical Networks Forecast", published November 2023), Access Switching and Ethernet Demarcation, (Omdia: "Service Provider Switching and Routing Forecast", October 2023) and network synchronization (Adtran Networks own estimates)

• Adtran Networks - Annual report 2023

Combined management report

Business development and operational performance of the group

Revenues

Revenues represent one of the four key performance indicators for Adtran Networks. In 2023, the group generated revenues of EUR 613.7 million, a decrease of 13.8 % on revenues of EUR 712.1 million in 2022. Despite significant order backlogs at the beginning of the year, the easing of the semi-conductor crisis led to a softening of demand from most customers due to their high inventories, this was particularly evident with telecommunication service providers and internet content providers (ICPs12). The group reported revenues of EUR 118.5 million in Q4 2023. This corresponds to a decrease of 18.7 % compared to Q3 2023 and of 39.5 % compared to Q4 2022 and results, similarly this is driven by telecommunication service providers and internet content providers.

Revenues by region

(in millions of EUR and relative to total revenues)

In 2023, EMEA (Europe, Middle East and Africa) was again the most significant sales region, followed by the Americas and Asia-Pacific.

Year-over-year, EMEA revenues of EUR 348.5 million in 2023 were down from EUR 403.7 million in 2022. Adtran Networks continues to maintain a broad and loyal customer base in this region, however, high customer inventories have driven lower demand in 2023. Enterprise revenues nevertheless remain strong. The decline of 13.7 % compared to the previous year is due to low demand from service providers.

In the Americas region, revenues decreased from EUR 233.8 million in 2022 to EUR 210.6 million in 2023. This, similar to EMEA, is driven by decreased demand from service and internet content providers.

In Asia-Pacific, revenues also strongly decreased from EUR 74.6 million in 2022 to EUR 54.6 million in 2023. Also here the decline in key customer demand due to high inventories drove the decline.

12 ICPs are companies that create, store and distribute digital content. ICPs are often also referred to as OTT (over-the-top) providers, Web2.0 or digital media companies.

Adtran Networks - Annual report 2023 9

Combined management report

Results of operations

				Portion of				Portion of
(in millions of EUR, except earnings per share)		2023		revenues		2022		revenues
Revenues	613.7	100.0 %	712.1	100.0 %
Cost of goods sold *)	(395.1)	64.4 %	(477.2)	67.0 %
Gross profit *)	218.6	35.6 %	234.9	33.0 %
Selling and marketing expenses *)		(68.5)		11.2 %		(76.2)		10.7 %
General and administrative expenses *)	(42.1)	6.9 %	(51.7)	7.3 %
Research and development expenses *)	(105.6)	17.2 %	(99.3)	14.0 %
Other operating income and expenses, net	11.0	1.8 %	10.5	1.5 %
Operating income	13.3	2.2 %	18.1	2.5 %
Interest income and expenses, net		(3.3)		0.5 %		(2.1)		0.3 %
Other financial gains and losses, net	(4.0)	(0.7)%	4.1	0.6 %
Income before tax	6.0	1.0 %	20.1	2.8 %
Income tax expense (benefit), net	(20.5)	3.3 %	(1.9)	0.3 %
Net income	(14.5)	(2.4)%	18.1	2.5 %
Earnings per share (in EUR)
basic	-0.28			0.35
diluted	-0.28			0.35

*) Since 2023, rental expenses for offices have been allocated to the functional areas. Previously, these were included in general and administrative expenses. The previous year's figures have been adjusted accordingly in the table above and in the following charts.

Cost of goods sold and gross profit

Cost of goods sold decreased from EUR 477.2 million in 2022 to EUR 395.1 million in 2023, primarily due to the lower revenues as well as cost reductions in manufacturing overheads. Cost of goods sold includes amortization charges for capitalized development projects of EUR 39.2 million in 2023 after EUR 41.9 million in 2022.

Gross profit*)

(in millions of EUR and relative to total revenues)

*) Since 2023, rental expenses for offices have been allocated to the functional areas. Previously, these were included in general and administrative expenses. The previous year's figures have been adjusted accordingly.

Gross profit declined to EUR 218.6 million in 2023 after EUR 234.9 million in 2022, comprising 35.6 % and 33.0 % of revenues, respectively. The groupʼs gross margin in 2023 was positively impacted by decreasing costs due to the ending supply chain crisis. In addition, the USD devaluation against the EUR had a positive effect on the gross margin, as a significant portion of the

10 Adtran Networks - Annual report 2023