In 2011, Transmode continued to grow in all three regions – with improved profitability. Significant events during the year:

• First and foremost, we made important inroads into new, growing market segments, including mobile backhaul and video distribution networks.

• Second, Transmode was introduced on the NASDAQ OMX Stockholm in May. The fact that Transmode is now a stock-listed company gives all of our processes and products an impressive stamp of quality. This shows the market that we have a clear and viable business plan in place that will enable Transmode to attract new, strong investors.

Transmode’s ability to generate profitable growth is primarily based on three success factors: an annual market growth of approximately 13 percent*; the ability to provide innovative products at the forefront of technology; and a focus on working effectively across the entire business.
In 2011, Transmode continued to meet our objective for profitable growth. Sales amounted to SEK 916.9 million (699.3) with an operating margin of 16.3 percent (15.4).
The company delivered a strong cash flow, that amounted to SEK 139.4 million. Transmode is still very well capitalized, debt-free and at the end of 2011 had an equity ratio of 70.4 percent. Our high equity ratio, in particular, is important for the company. This is because Transmode’s customers have based much of their future business on Transmode’s products, and therefore have high demands on our ability to maintain a stable financial position.
Transmode’s market, equipment for the Metro WDM segment, grew by 30 percent measured in USD, around the globe during the year. Sales increased by 31.1 percent (38.4 percent adjusted for exchange rate fluctuations). This means that we are growing faster than the market.

A growing market with a strong underlying driving force
The amount of data carried over fiber optic networks is dramatically increasing as a result of greater video traffic, use of mobile broadband and cloud services. This creates a strong demand for Transmode’s products, which make it possible to multiplex wavelengths in the fiber, thus increasing the capacity of each optical fiber by up to 80 times. An ever-growing need for investment in fiber networks will continue to fuel market expansion and make Transmode’s business concept increasingly attractive. Overall, the market for Metro WDM increased to approximately USD 4.7 billion during 2011 and the market is expected to grow by a further 13 percent per year during the next five years.*

New business opens up new market segments
In 2011, Transmode landed its first big contract in the Mobile Backhaul segment when we signed an eight-year agreement with British Virgin Media. Simply put, we will deliver equipment to communicate through fiber optics between base stations. This replaces existing backhaul infrastructure, much of which is copper or radio-based and lacking the capacity needed to handle rapidly increasing data traffic. Another important order in a relatively new segment involves the first delivery of our new “Switched Video Transport” solution. Switzerland’s largest cable TV operator, upc cablecom, chose Transmode’s approach for its ability to handle the explosive traffic growth generated by the transition to highdefinition television (HDTV).
2011 also saw several large deliveries carried out. One of the most significant of these was the 2010 order from Norway’s Telenor concerning equipment to build new WDM-based regional networks in Norway. Overall, Telenor has now deployed Transmode’s TM-Series at 200 sites in order to meet the increased demand for capacity from fixed and mobile broadband traffic.
These three large deals provide us with excellent references, which in turn helps create opportunities for similar business in other markets.

Innovative Products
This year we continued to develop the intelligence in our WDM systems. This entails adding features to improve performance and the ability to control and monitor traffic without deviating from the WDM standard. A large and growing area of WDM is Ethernet- based services, and we are one of the few vendors that offer this fully integrated functionality in our existing units. We introduced new Ethernet products in 2010 and this effort has led to high sales volumes for 2011.
During the year we also launched our product strategies around 100 Gbit/s per wavelength, and we will begin delivering products in 2012. Gbit/s is a measure of transmission speed, and in its completed form the 100 Gbit/s solution will enable transfer rates of up to 8 Tbit/s in a single fiber pair. Simply stated: one can transport data from 80,000 households, each with a 100 Mbit/s broadband connection, via two threads that are about one-tenth the thickness of a strand of hair.

Efficient operations
One of the reasons we compete so successfully with the giants in our field is that we focus our development resources on a single product family. This works best when all of our developers are situated in the same building. Maintaining this high efficiency in product development was a major factor in our decision to move to new premises in 2011.
Another important factor in maintaining the daily efficiency of our business is our relationship with suppliers. While we outsource production, we do the final configuration, packing and delivery to the customer ourselves. This provides better control over our supply chain as compared to companies that supply directly from contract manufacturers. During the year we have continued our efforts to reduce production costs, which has helped us to maintain healthy margins. This ability to truly focus on working effectively across the entire business is what makes the difference between growth and profitable growth.

Satisfied customers, motivated employees and sustainable business
In 2011, we increased our workforce by 31 people, including sales staff in San Jose in the USA and Tokyo, Japan. Equally pleasing for me personally is that both our customers and our employees are still very satisfied according to the customer and employee surveys we carry out each year.
In the past year, we also continued to work at reducing our environmental impact and to formulate clear demands on our suppliers.

Global expansion
We are continuing our expansion into new markets and during the year we strengthened our strategic partnership with NEC. Through NEC, we now have customers in Latin and North America, Asia and Europe.
Looking towards 2012, our focus is on further developing our sales channels and strengthening our presence in the North American market to better serve our customers with installation and technical support. At the same time, we will build our resources in Europe and Asia. However, we will continue our one-site strategy with our corporate headquarters, development and supply/logistics concentrated in Stockholm.
Our market is driven by the on-going growth in data traffic, such as video applications, business services, “cloud” and mobile broadband. Thus, there is a continuing need for investment in equipment that increases the capacity of optical fiber networks. Today, we see nothing to suggest that these needsare declining. As for the present economic turmoil, particularly in Europe, we have not seen any impact on our business. We continue, however, to follow these developments closely. Thanks to our inroads into new market segments, our strong financial base and our established business model, we are well positioned to benefit from the continuing growth in our market.

Karl Thedéen
Stockholm, Sweden, April 2012