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ADVA Optical Networking SE · PDF file 17-09-2019  · ADVA’s second largest shareholder, the EGORA Group, which has a 14.9% stake in the company. WEAKNESSES Small size relative

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  • 17 September 2019 ADVA Optical Networking SE

    FIRST BERLIN Equity Research

    Analyst: Simon Scholes, Tel. +49 (0)30 - 80 93 96 94

    17

    ADVA Optical Networking SE A D

    Germany / Technology Frankfurt

    RATING BUY PRICE TARGET € 8.50

    Bloomberg: ADV GR Return Potential 30.2% ISIN: DE0005103006

    Initiating Coverage

    Risk Rating High

    POISED TO RIDE THE EDGE NETWORKING BOOM Simon Scholes, Tel. +49 (0)30 - 80 93 96 94

    FINANCIAL HISTORY & PROJECTIONS 2016 2017 2018 2019E 2020E 2021E

    Revenue (€ m) 566.69 514.47 501.98 540.38 591.20 649.19

    Y-o-y growth 28.2% -9.2% -2.4% 7.6% 9.4% 9.8%

    EBIT (€ m) 19.37 4.40 14.99 13.23 21.09 29.00

    EBIT margin 3.4% 0.9% 3.0% 2.4% 3.6% 4.5%

    Net income (€ m) 21.35 -4.23 9.68 8.25 14.02 20.36

    EPS (diluted) (€) 0.43 -0.09 0.19 0.16 0.28 0.40

    DPS (€) 0.00 0.00 0.00 0.00 0.00 0.00

    FCF (€ m) 7.14 -27.44 12.09 -11.30 -0.26 4.36

    Net gearing -8.7% 19.4% 13.2% 32.4% 32.4% 30.2%

    Liquid assets (€ m) 84.87 58.38 62.65 54.04 59.12 64.92

    RISKS Risks include but are not limited to: loss of key customers/channel partners, currency risk (particularly USD appreciation/GBP depreciation), the US-China trade conflict, price pressure from Huawei.

    COMPANY PROFILE ADVA develops, manufactures, and sells optical networking solutions to deliver data, storage, voice, and video services. To date, the company's networking solutions have been deployed in more than 10,000 enterprises and more than 300 carrier networks around the world. Founded in 1994 and headquartered in Munich, Germany, ADVA had 1,917 employees at the end of June 2019.

    MARKET DATA As of 9/16/2019 Closing Price € 6.53 Shares outstanding 50.16m Market Capitalisation € 327.56m 52-week Range € 5.66 / 9.78 Avg. Volume (12 Months) 165,107 Multiples 2018 2019E 2020E P/E 33.9 40.4 23.7 EV/Sales 0.8 0.7 0.7 EV/EBIT 26.8 30.4 19.1 Div. Yield 0.0% 0.0% 0.0% STOCK OVERVIEW

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    ADVA Opt ical Net work ing SE DAXsect or Al l Technology

    COMPANY DATA As of 30 Jun 2019 Liquid Assets € 48.28m Current Assets € 249.16m Intangible Assets € 193.09m Total Assets € 519.05m Current Liabilities € 152.05m Shareholders’ Equity € 247.86m SHAREHOLDERS Teleios Capital Partners GmbH 20.2% EGORA Group 14.9% Morgan Stanley 3.9% Dimensional Fund Advisors LP 3.2% Free float and other 57.8%

    The advent of the Internet of Things, 5G mobile tel ephony and fibre deep initiatives are ending the dominance of centralised cloud compu ting and driving a wave of investment at the networ k edge. The rise of edge networking looks set to be the most significant d evelopment in telecommunications network architecture over the ne xt decade. By virtue of recent acquisition activity and R&D spending, AD VA is very well placed to participate in the forthcoming boom. Concerns ce ntred on the US- China trade conflict have pushed the share roughly one th ird off its Apr il high of €9.78, but we think recent tariff rises are now mostly priced in and set a price target of €8.50. Our recommendation is Buy.

    Shift in sales mix to faster growing, higher margin edge networkin g businesses We forecast a sales compound annual growth rate (CAGR) of 9.8% for ADVA over the five year period 2019-2024 driven mainly by the impact of increasing network edge investment on ADVA’s carrier / NFV (network functions virtualisation) and network synchronisation technology segments (35% of 2018 sales). We believe that ADVA’s margins are higher in these segments than in optical networking (65% of 2018 sales). We expect their faster growth and moderating group R&D costs following the heavy expenditure of recent years to widen ADVA’s proforma operating margin from 4.0% in 2019 to 9.6% in 2024. This translates into an EPS CAGR over the same period of 41.8%.

    Prospect of market share gains following launch of FSP 3000 TeraFlex In Q2/19 ADVA launched the latest generation of its FSP 3000 optical networking terminal - the state-of-the-art FSP 3000 TeraFlex. Management is particularly optimistic that the product will enable ADVA to regain share of the ICP (internet content provider) market. ICPs accounted for ca. 10% of ADVA’s revenue in 2018 but this figure was significantly higher as recently as 2016.

  • 17 September 2019

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    CONTENTS PAGE

    ADVA Optical Networking SE – Executive Summary.................................................................................... 1 Investment Case ........................................................................................................................................... 3 SWOT Analysis............................................................................................................................................. 4 Valuation....................................................................................................................................................... 6 Company Profile ........................................................................................................................................... 8

    Optical networking growth drivers ........................................................................................................... 8 The Internet of Things is a key driver of investment in edge networks.................................................... 9 ADVA’s addressable market and product portfolio.................................................................................. 9 ADVA’s customers ................................................................................................................................ 11

    Financial History and Outlook ..................................................................................................................... 15 P&L account 2013-H1/19 ...................................................................................................................... 15 Financial position................................................................................................................................... 16 Q2/19 results......................................................................................................................................... 16 Outlook.................................................................................................................................................. 17

    Management ............................................................................................................................................... 18 Shareholders & Stock Information .............................................................................................................. 20 Income Statement....................................................................................................................................... 21 Balance Sheet............................................................................................................................................. 22 Cash Flow Statement.................................................................................................................................. 23

  • 17 September 2019

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    INVESTMENT CASE

    ADVA IS VERY WELL PREPARED FOR THE EDGE NETWORKING BOOM The consultant McKinsey has identified over 100 already deployed edge computing use cases across 11 sectors including travel, transportation and logistics, energy, retail, healthcare and utilities. McKinsey expects these use cases to generate USD200bn in hardware revenues by the mid-2020s. This hardware will require networking and the networks will require an operating system. ADVA has been preparing for the forthcoming boom for several years. In 2016 it acquired edge network operating system software capabilities through the acquisition of Overture Networks. In addition, in recent years it has devoted substantial R&D to NFV technology, which enables fast and flexible service implementation at the network edge. ADVA has also expanded its NFV partner programme and now claims the world’s largest portfolio of these solutions.

    FSP 3000 TERAFLEX CAPACITY >50% ABOVE LEAD COMPETITOR’S PRODUCT The new FSP 3000 TeraFlex optical networking terminal uses new fractional quadrature amplitude modulation capabilities to allow increased traffic over existing networks without additional investment. ADVA claims that the product provides 50% more capacity than the leading competitor’s current product. The importance of the new TeraFlex product can be gauged from a management statement in the 2018 annual report: “The launch of our new Teraflex terminal has the potential to change market momentum in our favour.”

    SALES MIX SHIFT TO EDGE NETWORKING TO DRIVE 2019-24 EPS CAGR OF 41.8% In 2018 optical networking, carrier / NFV, and network synchronisation respectively accounted for 65%, 30% and 5% of group sales. We forecast a sales CAGR of 9.8% for ADVA over the five year period 2019-2024 driven mainly by the impact of increasing network edge investment on ADVA’s carrier / NFV and network synchronisation technology segments. By 2024 we expect the faster gro