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Nortel Networks Corporation (NT)

Q3 2006 Earnings Call

November 7, 2006 8:00 am ET

Executives

Terry Glofcheskie - Vice President, Investor Relations

Mike Zafirovski - President, Chief Executive Officer

Peter Currie - Executive Vice President, Chief Financial Officer

Analysts

Edward Snyder - Charter Equity Research

Paras Bhargava - BMO Nesbitt Burns

Vivek Arya - Merrill Lynch

Inderbir Singh - Prudential Equity Group

Chris Umiastowski - TD Newcrest

Brantley Thompson - Goldman Sachs

Phil Cusick – Bear Stearns

Ken Muth - Robert W. Baird

Jiong Shao - Lehman Brothers

Ehud Gelblum - JP Morgan

Mark Sue - RBC Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 2006 third quarter financial results conference call. During the presentation today, all participants will be in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded today, November 7, 2006.

I would now like to turn the conference over to Mr. Terry Glofcheskie, Vice President, Investor Relations. Please go ahead, sir.

Terry Glofcheskie

Thank you, Operator, and good morning, everyone. Thank you for joining us on the call this morning to discuss our third quarter 2006 results. With me today are Mike Zafirovski, our President and Chief Executive Officer; Peter Currie, our Executive Vice President and Chief Financial Officer. After Mike and Peter make their comments, they will be happy to take your questions.

Just before we get underway, let me remind you that certain comments made in today’s presentation may be characterized as forward-looking under the United States Private Securities Litigation Reform Act of 1995, and under Canadian Securities legislation.

Certain material factors and assumptions were applied in making these statements, and there are a number of other factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Nortel.

Additional information concerning these factors and assumptions is contained in today’s press release and in Nortel’s filings with the United States Securities and Exchange Commission and the Canadian securities regulators.

At this point, let me turn it over to Mike for comments. Mike.

Mike Zafirovski

Thank you, Terry. Good morning, and thank you for joining us this morning. We look forward to seeing many of you next week at our analyst and investor day, on November 15th.

For today’s call, we are going to cover the Q3 results. We will update our guidance, and before we close, we will spend a few minutes to answer anymore of your questions.

First let me provide you with a general update on the quarter, as well as the perspectives on some important steps which we are taking to be moving the business forward.

First, sales for the quarter were strong, 17%. The revenue growth was in all regions. In particular, we are very pleased with the growth in our next generation products. There is also a benefit from completing a number of our contracts, which is reflected by a reduced deferred revenue balance, which was down $171 million for the quarter.

On a year-to-date basis, deferred revenues were down by $45 million. As we have indicated before, we do expect for the total year for deferred revenues to be down by a material amount.

Orders were flat for the quarter. The book-to-bill is 0.8. This is mostly as a result of timing of CDMA orders and, to a much lesser extent, decreasing UMTS and GSM activity. Backlog remains at a very robust $5.2 billion.

Gross margin was down at 38.1%. This is the fifth consecutive quarter that our margin has been between 38% and 39%, so the margin has stabilized, but we remain very focused on improving the margin and we will discuss some of our plans on it later in this call.

One of the very specific actions which we have taken is to renew the emphasis on reducing our material costs within the gross margin line. In this connection, we have amended our contracts with Flextronics, which we believe is a win-win for both companies.

We are also driving programs to improve our competitiveness. We announced a few in the last quarter, and Peter and I will be discussing programs to accelerate the business transformation initiative, both the BT as well as those six initiatives not to only drive gross margin, but to accelerate our efforts to achieve world-class levels in G&A, R&D, and, as I had indicated, gross margins.

Very exciting is that we are seeing improving trends in our customer employee satisfaction fronts. I have made the comments that this will be a very important indicator of the status of the company. As one example last week, we received a new employee satisfaction results. They were up 20% from where we were in the April timeframe.

Last and most exciting, we have a number of very promising customer wins, which I will highlight in the next page. I will not go through the details of those. We are going to be issuing press releases throughout the quarter, but they are very broad-based and quite a few of them are on next generation products. Starting from wireless now going CDMA, where we are strengthening our number two position, but also in WiMAX, metro ethernet, secure routers, enterprise IT solutions, including New York Times, a transaction which was announced last week with Economist, a telegraph group.

Also, a number of wins in the carrier voice over IP arena, including IMS, and in services, including a very significant transaction which we announced early in the quarter with Rolls Royce.

Let me move on now to a number of specifics, starting with orders. Orders for the quarter are $2.350 billion, essentially the same as Q3 of 2005. As I indicated, book-to-bill is 0.8 for the quarter, but driven largely by the very significant CDMA orders which we had in Q2 and, to a lesser degree, the decrease in UMTS and GSM activity.

As I indicated before, backlog was down about $600 million as a result of the book-to-bill at being at 0.8, but still a very robust $5.2 billion.

Looking at the financial highlights, which is on slide 9, and I will make just a couple of comments on this, and afterwards I will discuss our revenues by business. I will also discuss the gross margin trends, and Peter will be discussing the rest of the financial information.

A couple of comments on this page before moving on to the details. As I indicated, revenues are up 17%, good momentum across most regions, across all business units and especially our next generation solutions.

Operating margin was positive for the first time this quarter. It was up 270 basis points versus last year as we were leveraging our growth. Revenue was up 17%, with expenses up 7%.

Of course, we are pleased with our revenue growth. However, I am not satisfied with the pace of our progress.

Pricing pressures and the speed with which our revenues are shifting to next generation, [older] cycle products is a challenge to our goal of significantly increased profitability. The management team and I are fully committed to achieving number one, higher gross margins, and also achieving globally competitive cost structures. We will be accelerating our business transformation in six sigma programs to close the gap and to achieve double-digit operating margins in 2008.

I believe our recent steps in establishing the Microsoft alliance, divesting our UMTS access business, and increasingly shifting resources to lower cost centers are indicative of our resolve to achieve both growth as well as an increased profitability.

Let’s move on now to revenues by business, starting with mobility and converged core. Revenues were up strong, 23%. As you can see, CDMA was up 37%, revenues of $704 million, driven by North America and EV-DO Rev A. Momentum is expected for the remainder of the year, and EV-DO is supposed to be very strong throughout 2007, as well.

GSM and UMTS was up 8%. Growth was driven primarily by the completion of contracts in EMEA. Also, we announced last quarter the sale of a UMTS business to Alcatel, and based on current trends, we do expect the transaction to be completed later this year. Revenues are expected to start declining in this product line in 2007.

Circuit and packet voice growth was up 27% . Again, growth driven primarily by the Succession product line in North America and EMEA. Although we did not have revenues for WiMAX, we saw very nice momentum during the quarter. We had a field trial with Russia’s Golden Telecom. We will be deploying WiMAX with Craig Wireless in Greece, and I believe we had a very positive showing at a Boston WiMAX forum. I had meetings with customers. There are many requests for trials, but we will try to limit the trials to five, to work with the resources on it and to demonstrate the benefits from the WiMAX solution.

Moving on to enterprise, network revenues were up 14% for the quarter. If you look at circuit packet and voice solutions, they are up 20% -- the highest revenues in the last five quarters. We have seen nice momentum in the BCM50 product, and also starting to see the benefits from the IPT 123 program which, as you may recall, is a program to move a seamless, simple upgrade from PBX to voice-over-IP.

We are seeing nice IP telephony growth in the second-half. As I said, we expect that to continue growth in the fourth quarter.

We see nice wins, for example, with The New York Times, which is a combination of IP devices, unified messaging contact center, and data and security solutions.

Data networking security was flat year over year at $179 million, with a nice win for Wireless Mesh of Tokyo’s City Shopping Arcade.

Moving on to metro ethernet network revenues, up 18% for the quarter. Optical networking continued very strong, profitable growth. We remain number one in metro DWDM. A nice optical, multiservice Edge 6500 momentum with customers like COLT, Golden Telecom, and Southern Cross.

We also completed the Optus transaction, the Optus software upgrades which resulted in a completion and realization of the previously deferred revenues.

Data networking securities up 13%. Again, a couple of the transactions included the Shanghai Telecom Metro Ethernet networking solution.

We are very excited for our Provider Backbone Transfer product, PBT. We were the single vendor to show it at Carrier Ethernet World Congress, and we are in the process of quoting at a few very prominent customers.

Last, business global service revenues, as we had indicated, will start showing revenues for increased transparency. For the first quarter, we are doing it. I should highlight this -- the revenues exclude the network implementation services. As you may know, we do provide installation services, typically bundled with product sales. We believe we will be able to start showing those within global services as of the first quarter of 2007.

The global services model, which we will be discussing in some detail at next week’s investor day, we will be showing four specific service product groups and two business solutions. During the quarter, we had a very nice win with Videotron, a multi-year contract, and also with Swisscom for carrier-hosted voice-over-IP solution.

With the announcement of the Microsoft alliance, we really are aiming to have within global services to be a key integrator as companies move from PBS and voice-over-IP to unified communications in the upcoming years.

A quick summary of geographic revenues. Growth was robust in most of the regions. The recognized previously deferred revenues had impact for most of the regions. For North America, it was a negative. It helped EMEA and Asia. Again, overall the growth is very positive. We expect positive growth in the fourth quarter as well.

A few of you have been asking about the incremental impact of LG and Nortel Government Solutions. The incremental impact on the fourth quarter is $86 million, offset by $16 million of revenues from products or businesses which we have exited, so $70 million of this incremental impact, if you will, of the new activities.

In gross margin, page 15, the gross margin was at $1.1 billion, or 38% as a percentage of revenues. Gross margin increased $147 million from last year, principally as a result of higher volumes. It goes down 70 basis points as a result, both sequentially and year over year.

As I've indicated, we've stabilized the margin in the 3% to 3.5% range. The reason for the pressure is three main reasons:

The first one is the impact of higher proportion of next-generation product sales force. As you know, typically next-generation products have lower margins in the early stages before productivity and volume kick in. One good example is CDMA EV-DO; although good margins, not as high as we've had at prior CDMA revenues. As I've said, with ongoing productivity and volume trends, we do expect those gross margins to be increasing in subsequent quarters.

We are also seeing increasing pricing pressures in India in emerging markets, and also the impact of original mix with less of a growth in North America in Q3 relative to EMEA and Asia. And, the impact of the EU, the European Union’s environmental directive.

As I mentioned previously, the margin is stabilizing at 38% to 39%. We are very committed to drive aggressively improving margins and we will discuss that later in this call.

Peter will discuss the other financials and I will be back later on the call.

Peter Currie

Thanks very much, Mike and good morning, everybody. We'll talk first about selling, general and administrative expenses and you'll see from chart 16 that SG&A was actually $38 million higher in terms of dollars but it was two points better as a percentage of revenues in the third quarter of this year versus the third quarter of 2005. That was mainly due to increased SG&A expenses resulting from the consolidation of the LG joint venture. That that correlates, of course, to the revenue benefit that we discussed a few minutes ago.

There was also an increased investment in business transformation initiatives and we had flagged that previously, saying there would be some upfront investment in order to get the BT initiatives rolling, and that is indeed transpiring. This was partially offset by lower restatement and governance-related and employee benefit plan costs in the quarter.

On research and development, you'll see that R&D expenses of $480 million, or 16% as a percent of revenues, were up $37 million this year compared to the third quarter of 2005 on a dollar basis and 1.4 percentage points better as a percentage of revenues. Q3 2006 R&D expenses included increased investments in areas such as video, IMS and WiMAX, as well as increased expenses as a result of the consolidation of the LG activities in South Korea.

Similar to SG&A, this was partially offset by lower employee benefit plan costs as well as our own going efforts to streamline and focus our R&D programs that we've been discussing on a number of our previous calls.

If we turn now to Page 18, the third quarter highlights, this is a reprise of the chart that Mike showed. You will see that our financial results display revenues of $3 billion for the quarter, about a 17% increase over the same period last year. Gross margins, as Mike indicated, at 38.1% were down one percentage point from the previous year, and operating expenses at $1.1 billion were up about $100 million year over year. The net loss of $99 million was an improvement of $37 million from 2005.

On a year-to-date basis, our revenues were $8.1 billion or a 7% increase to 2005 and net income was $100 million which is up $373 million from last year. Earnings per share at $0.02 on a diluted basis is an improvement of $0.08 from the previous year.

Now as you might expect, there were some items that impacted the quarter in particular, and those are shown on chart 19. There was a $43 million benefit arising from the pension plan restructuring that we announced in the quarter. There was about a $38 million shareholder litigation expense related to the fair value adjustment of the equity portion of the agreement and we have explained that, of course, in previous calls. Additionally, there was $25 million taken for restructuring in the quarter, primarily related to activities undertaken under the 2001, 2004 and 2006 restructuring programs.

Finally, there was a $16 million gain on sale relative to a leaseback arrangement closed in the quarter on one of the facilities that we're restructuring in our real estate portfolio.

On chart 20, we talk about cash flow and you'll see on this chart the cash at the beginning of the period was $1.9 billion. Net cash used in operating activities was $46 million in the quarter, primarily due to a net loss of $99 million from continuing operations that we discussed a moment ago, minus adjustments related to the working capital and plus other non-cash items such as the shareholders settlement mark-to-market adjustment of $38 million and depreciation of $86 million.

The net change in our operating assets and liabilities were $247 million, including cash payments for pension plan funding of $115 million, restructuring payments of about $27 million, and various movements in working capital of $71 million.

In terms of investing activities, this represents net proceeds from the disposal of plant and equipment of about $124 million and in addition, there were expenditures of $83 million for new plant and equipment, basically refurbishment and recapitalization.

In the quarter, as we mentioned, there were financing activities and what you see here is the net impact of the proceeds of the long-term note net of the repayment of the interim facility. Finally, foreign exchange on cash resulted in about a $6 million increase in the quarter, so we ended the quarter at $2.6 billion.

In terms of future uses, because I know that this has come up on calls before, future uses of cash over the next 12 months include the following: in terms of operating activities, we have the proposed litigation settlement of $575 million, plus accrued interest. That would come out of our restricted cash. There are pension and post-retirement obligations of about $440 million and restructuring costs of about $100 million, as well as certain costs related to the implementation of our new financial systems infrastructure, the SAP system, as well as some capital expenditures over the course of the next year.

On chart 21, we look at some operating metrics and there are a number I would like to touch on here. The first is DSO, days sales outstanding, related to velocity of our accounts receivable process. It stands at 85 days, which is an improvement of six days from the second quarter and that reflects the impact of continued focus on timely collections across all the regions.

The second is net inventory days, which in this case excludes the deferred costs. They were 27 days, which is a seven-day improvement from the second quarter, really due to higher cost of sales in the quarter and the impact of the efforts to reduce inventory levels through our outsourcing model. Again, we've touched upon this in several of our previous calls.

The third metric is days payable outstanding, which is the velocity of our accounts payable process and it stands at 43 days and that's actually down 13 days. Of course, higher is better here, mainly due to the impact of our accounts payable balance of the divestiture of the Calgary facility. This reflects the transition from our own operation to Flextronics during the quarter. Deferred revenues were $3.5 billion as Mike indicated, down $171 million on a year-over-year basis and book-to-bill was 0.8 leaving an order backlog of $5.2 billion.

Overall, while we've made some progress on our working capital initiatives, we'll continue to focus on overall operating cash flow. We would of course expect to see fluctuations on a quarter-to-quarter basis due to the volatility of our business, but we'll come back to working capital and cash in a few minutes.

On chart 22, I'd like to spend a moment on so-called guidance. We expect revenue growth in the mid to high single-digits for the fourth quarter of 2006 compared to the fourth quarter of 2005. We believe there will be continued growth across most of our business units and regions with strength continuing in our CDMA business.

Gross margins are forecasted to be between 38% and 39% of revenue. As indicated, we see competitive pricing pressures and the speed at which our revenues are shifting to next-generation, early cycle products will be more of a challenge to our profitability than we previously expected. As discussed, we are accelerating and enhancing our business transformation and lean Six Sigma programs to address this gap.

Spending is anticipated to be flat to up slightly compared to the fourth quarter of last year, and that's generally aligned with our previous expectation.

So based on this fourth quarter outlook for the full year 2006, we now expect mid to high single-digit revenue growth for the full year, compared to a year ago. We expect full year gross margins between 38% and 39%, and we expect operating expenses to be flat to up slightly from last year.

I'd like now to turn it back to Mike to focus us on the future.

Mike Zafirovski

Thanks, Peter. You probably misspoke with respect to the operating expenses for the fourth quarter, we expect those to be approximately flat.

Before the Q&A, we thought it important just to give you a brief update on the game plan, much more details will be forthcoming on the November 15th Analyst and Investor Day. You’ve seen this summary of our near-term priorities and the longer-term plan. Peter and I are going to try to very rapidly cover two items: one, the business transformation. As a reminder, this is a key program, along with the processes of employee engagement and Six Sigma to drive $1.5 billion operating margin expansion by 2008. Peter will give you an update on that.

And also, we are trying to accomplish both. Trying to drive the growth for short-term and long-term, and I will make a couple of comments on growth. Then we look forward to a robust Q&A. Peter.

Peter Currie

I am going to direct your attention to chart 24, which is the business transformation progress update. You have seen this in prior calls, and it is included here to reinforce our commitment to the very meaningful improvement in operating margins that we are pursuing over the course of this year and the following two years, as Mike has indicated. I won’t go through these in individual detail, but there are a few elements that I do want to touch upon.

In terms of direct materials, we have now amended the arrangement with Flextronics to allow acceleration of the benefits into 2007. We are seeing an increase in what we call the wave one or the first phase of that opportunity on the first $700 million of material procurement. The largest incremental impact, of course, of this will now be in 2007 and 2008.

In terms of services, we have announced our centers of excellence in Mexico and Turkey and they are well underway. We’ve implemented policy changes regarding the provision of services to our partners to be more in line with the marketplace.

In terms of enterprise, which is under the heading of revenue stimulation, we have initiated pricing activities which should generate in the range of $100 million. The big focus through 2007 is to improve our pricing architecture on a global basis.

Research and development, we have talked about this before, we've undertaken what we call a clean sheet analysis of major product investments. There is a software development methodology rollout and implementation that should improve the efficiency and velocity of software development; and of course, we're continuing with our platform and laboratory consolidation program.

Under general and administration and organizational updates, we're out to achieve globally competitive benchmarks through various process improvements across the board in SG&A. We announced in June certain changes to our pension plan which will result in about $100 million annual savings starting in 2008, and savings of more than $400 million in cash by 2012. Additionally, the annual savings from our organizational simplification programs, which include delayering, will generate about $20 million as well as our move towards world class benchmarks in G&A should lower our overall costs by about $100 million in G&A next year.

Finally on this chart we're developing a corporate shared services strategy and implementation plan.

So let's move to chart 25 which gives you some idea of some of the things that we're pursuing. Recognizing the pressure on our profitability from both global competitive dynamics and our changing product and regional sales mixes, we're accelerating the implementations of the programs I just described.

I mentioned a moment ago we're using global standard benchmarking and in fact, we are to ensure we're implementing not only the correctly sized organization but the most effective processes to run the business. This is being vigorously pursued throughout our support organizations which we define as areas such as legal, human resources, information technology, compliance and finance. The benefits will be evident starting next year.

We've also undertaken an amendment to the Flextronics agreement which builds upon our natural operational synergies and allows Nortel to more directly participate in the manufacturing cost reduction process through manufacturing engineering as well as material procurement. What that does is it accelerates the cost advantages to our Company next year. The advantage to Flextronics is a more vibrant relationship with a major customer and the ability to apply these learning to their other customers to create better value for all participants.

Our clean sheet approach means going back to first principles in areas such as manufacturing and R&D and redesigning the processes and resultant outputs for maximum efficiency. This has yielded very good results for us this year in the direct materials area and we're now expanding the application.

Finally, as you know, one of our challenges has been in the area of liquidity. We're pleased with our current position in terms of cash relative to our recent refinancing and the structure of our proposed class action litigation settlement, but there's more to do. Our working capital metrics in the areas of accounts receivable and inventory, as I just mentioned, are far off best-in-class levels and we've launched several initiatives to close this gap with results starting to show up in 2007.

On chart 26, in terms of the goals that we're striving for, let me give you some specifics. I mentioned G&A levels weren't world class, and certainly that's traceable in large part to the huge dislocation this company has been going through over the past few years; but that doesn't mean that we're either in a sustainable or acceptable position. Each of the support areas I mentioned a moment ago are engaged in benchmarking activities and will be sharply reducing their operating costs to get globally competitive, with half the savings showing in 2007 and the balance in 2008.

The only exception is finance, which is where we expect to deliver a third of the savings next year since it is still very heavily dedicated to installing our new financial information system and leading the resolution of our material weaknesses.

In total, our G&A cost as a percent of revenues are expected to decrease by approximately 500 basis points throughout this program. I said before that R&D is the engine which drives this Company and we absolutely believe that; however, we do need to sharpen our focus in the entire R&D arena and become more cost effective in creating new products and applications as well as shortening our time to market.

Our plan is to apply more rigorous development disciplines and continue to cull certain lower value programs to lower our R&D run rate from its current level of about 18% of revenues to 15% by mid-2007.

I mentioned the amendment of the Flextronics arrangement and its intensified focus on our own controllable activities in the areas of direct materials. We expect to deliver half of our total previously committed savings in 2007, which represents an acceleration from future periods.

Real estate has been a challenging area for our company. During the rapid expansion during 1998 and 2001, we became involved in a large number of quite significant real estate arrangements and it was all to cope with our growth. During the past few years, we've dramatically reduced the amount of real estate we occupy both through site disposals as well as reducing the space occupied per person and using more modest premises. But there's more to do and we're targeting a reduction of our real estate related expenses by 20% by the end of next year and we'll continue to look for the most effective way to manage this resource. That that translates to about $75 million on a year-over-year savings basis.

The acceleration of the business transformation programs to reduce operating costs and improve ongoing operating margins may, of course, result in additional restructuring costs as the programs are being launched.

The next chart deals with working capital, and this is chart 27. Earnings, of course, are important but companies run on cash and this is absolutely true for Nortel. We've been challenged over the past few years to optimize our cash since our restatements have kept us out of capital markets at some very attractive times. We're also using our available cash to restructure the business and reinvest our future growth. Our major debt refinancing completed recently has placed us in an acceptable short-term position, but not for the longer term. We have a further debt maturity coming due in September of 2008 of $1.8 billion.

There is certainly room for improvement in our accounts receivable management and I talked about that; DSO in the high 80s is far from great, and inventory where our net inventory days of about 30 days does not give us a competitive advantage. Our accounts payable days, which actually have been averaging in the high 50s are very competitive but we think there's still more room to improve there.

Some of the actions we're taking are shown on this chart and we're pursuing them all and more and using the disciplines of lean Six Sigma to unlock the value. Our goal is to generate an incremental $500 million in cash from working capital during 2007.

Each of the foregoing initiatives I've talked about in the previous two or three charts is being led by a member of the senior executive team. As we highlighted to you in our discussion of the business transformation program, there's a very clear line of sight of ownership on these activities. Since we're accelerating many of these actions to maximize near-term benefit and move more quickly on the reformation of the company, there will be some implementation costs. We'll discuss these in more detail in the period in which they occur.

In any event, we're not moving away from it at all, our commitment to improve our operating margins to the low to mid-teens by 2008, and these actions will both solidified and accelerate their realization. I'd now like to turn the floor back to Mike to talk about some growth imperatives.

Mike Zafirovski

Thank you, Peter and we will be providing an ongoing update on the quarterly calls on all of those actions but I want to make sure that number one, there's a strong commitment to improving our cost competitiveness and there's equal commitment to driving growth.

To quickly summarize this page, we are executing a number of short-term actions which we've indicated before, whether it's in enterprise momentum or we're investing and strengthening our channels, boosting our SMB initiatives, driving IP solutions momentum and the momentum from the secure router activity. The services business, which was indicated, we are driving as a real business as opposed to an afterthought. Driving mobility and convergence to next generation and increasing confidence and results from partnerships. We’re to dance with Runcom and WiMAX, working with Broadstream on IPTV, and of course a significant announcement with Microsoft.

Above and beyond the current activities, we are building the foundation with three strategic pillars -- next generation mobility, enterprise transformation, and services and solutions.

Our next generation mobility strategy is anchored in our industry-leading intellectual property and innovation in two key technologies, OFD and MIMO. They are the fundamental enablers for all future wireless connections, including the evolution of CDMA, as well as LTE, WN, and WiMAX.

Enterprise transformation, we are trying to create a powerful ecosystem of [disruptive] partnerships to reinvent voice and transform the enterprise networks of our marquee installed customer base.

Of course, services and solutions, where we are enjoying whole new business activities, and a good example is the recent win with Rolls Royce.

Also, expanding our focus on SOA and web services, which are becoming the dominant framework for creating and delivering applications. We are very excited about the presentations, which you will see next week.

Let me just recap. Number one, solid revenue growth, both in next generation business activities and also the breadth of customer orders during the quarter. Number two, there is absolute commitment to accelerating the profitability model. We have seen gross margins, G&A, R&D, as well as some of the cash flow generating capabilities, and we give you more specific targets for each one of those lines. As I said, the whole management team looks forward to delivering on those and to report.

Integrity and open, forthright and transparent communications. I believe we are living up to the commitments which I gave you almost a year ago when I came on this job. There is a firm commitment to growth and strong financials. The improvements will not happen overnight, but they are starting to show. We have set realistic and tough expectations and targets which, when achieved by 2008, will produce some of the best results in Nortel’s history.

We have a clear set of criteria for success and achieving sustaining market share relevance is fundamental to achieving that goal.

Thanks for your interest and we look forward to the Q&A now.

Terry Glofcheskie

Thank you, Mike and Peter. Before I hand it over to the operator to start the question-and-answer session, I ask, in the interest of all the people in the queue, that you would limit yourself to one question. Operator, we will take our first question.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Edward Snyder, Charter Equity Research. Please go ahead.

Edward Snyder - Charter Equity Research

Your gross margin guidance of 38% to 39% is down from the 40% you spoke of last quarter. What would you say is the largest part of the price downside of it -- price competition in legacy systems, especially wires, or higher mix of new products? Or do you think you are lowering the expectations from the upside for six sigma?

To the extent that it is due to lower gross margin on new products, when do you think we can expect volumes or experience in these systems will push margins back up?

Mike Zafirovski

Thank you very much for that question. You actually summarized the three main reasons.

If you are looking at competition in the markets, if you are looking at Q3 this year versus Q3 last year, and the average gross margin in the industry is down between 250 and 300 basis points. Obviously the market pricing is one element.

From our perspective is having a new product does have a related impact as well, but if I am stepping back, Ed, is this -- we cannot achieve a double-digit operating margin without gross margins being in the 40% plus. So the 38% to 39% is a hundred basis points lower than where we thought we were going to be in the fourth quarter, 100, 150 basis points. There is even a greater urgency on us to find ways -- it is mostly internal, how we run our company, the way we are driving designing products, and also working with our suppliers.

Peter made the comments on revising the contract with Flextronics, which I do believe is going to be a win-win for both companies. It is going to drive significant cost savings for us. I believe it is also going to be reducing the inventory levels for Flextronics. A part of that transaction was increasing the provisions to cover Flextronics’ restructuring activities, if they in fact need to move to a more competitive location.

So look at this thing holistically, we have given you a commitment on double-digit margins, and for us to achieve that gross margins on top of it, so I -- in brief, a combination of markets, a combination of an increased convergence to new products, and the net takeaway hopefully which you will take from this, that is a greater resolve for us to accelerate actions which we can take to get margin to be above 40%.

Terry Glofcheskie

Next question, please.

Operator

Our next question comes from the line of Paras Bhargava, BMO Nesbitt Burns. Please go ahead.

Paras Bhargava - BMO Nesbitt Burns

Thank you. Good morning, gentlemen. Just a question further out. In ’07, Mike, given that you have divested UMTS, what kind of revenue growth range would you expect? Or would you really expect the actions you are taking to show revenue growth in ’08?

Then, just as a request for Peter -- Peter, love the new segmented breakout. I wonder if we could get a little more history annually, anyway, and perhaps even quarterly on that. That would be very helpful. Thank you.

Mike Zafirovski

Thank you very much for that. Today, we are not going to provide any guidance for 2007 or 2008. As soon as we are done with this call, we are going to be kicking off our next phase of the budget reviews for next year, so we do not have that.

We are very bullish on the trends which we are seeing in our targeted areas, including next generation mobility, the enterprise transformation, what are we doing in services, so obviously we want to just get growth company, but on this call, we are not able to give you any particulars.

Paras Bhargava - BMO Nesbitt Burns

Could you say if it is up or down in ’07, given that you are going to lose about $500 million from UMTS, approximately? That would just be very helpful in terms of expectations.

Mike Zafirovski

No comment. I do not recall ever being in a company where we were down year versus year, but I will resist from given any communication no this call, as much as I hate too.

Paras Bhargava - BMO Nesbitt Burns

All right. Thank you.

Terry Glofcheskie

Thanks, Paras. Next call, please.

Operator

Our next question comes from the line of Vivek Arya, Merrill Lynch. Please go ahead.

Vivek Arya - Merrill Lynch

Thank you. Mike, my question has to do with -- you said this mix shift in new products is pressuring gross margins, and I am confused by that, because when I look at this quarter versus last year’s quarter, your CDMA sales are up 37%. My understanding was EV-DO revenues are higher margin, especially when we look at results from your competitors. Why are you seeing a decline in margin?

A related question, perhaps, is on operating expenses. Despite all the restructuring programs that have been put in place, why has op-ex actually increased year on year? If you could help us understand. Thank you.

Mike Zafirovski

A couple of comments, as there is this question. With respect to CDMA, this is a comment on EV-DO, which is new technology within CDMA versus the prior CDMA 1X. Relatively speaking, the same trends hold true when you have a new technology within CDMA, and as volume picks up in following quarters, as we drive up productivity, we will be seeing increasing profitability there as well. Of course, voice-over-IP is increasing very fast compared to what we used to have in TDM and ATM, so that trend is accelerating.

What I want to highlight is the fact that gross margins have been relatively flat, at 38% to 39% range, and the industry is down Q3 versus Q3 about 300 basis points. We are not happy we are down 70 basis points, but the market does play some impact, and we are pretty confident, and truly we are going to be able t reverse that trend and start actually growing GM in the not-too-distant future.

With respect to the SG&A, I may ask Peter to make some additional comments, but again, pension, the movement to Mexico and to Turkey. Those programs have been announced. They have not taken hold yet, and they will.

As it was said, the specific increase is a combination of exchange rates and adding LG into the mix, but those expenses will be going down in the aggregate, starting very soon.

Peter Currie

As Mike said, in terms of operating expenses, there are some dynamics that move in opposite directions. In fact, SG&A expenses were up $38 million in the quarter, as I indicated, but the ratio as a percentage of revenues has actually improved by two percentage points.

There are incremental costs associated with the inclusion this year of the LG business versus last year, where it was not included. That also impacts research and development. But we have seen lower expenses. We have been actively driving down the expenses in areas such as the restatement in governance costs, which is kind of important, as well as we have been encountering some back pressure from foreign exchange. Many of our expenses are denominated in Canadian dollars, and of course, year over year, the Canadian dollar has strengthened versus the American dollar.

But as Mike has indicated, we are absolutely focused on driving these expenses down to world-class levels. I tried to outline in my remarks some of the steps that we are taking and I think you will see substantial movement during the course of 2007.

Vivek Arya - Merrill Lynch

What was the impact, Peter, of the Flextronics inventory transition on gross margin? Was there any impact because of the inventory transition to Flextronics on gross margins this quarter?

Peter Currie

Not material on gross margin. The remarks I made relative to the Flex inventory transition were relative to the dislocation it caused in our accounts payable and how it drove the days payable outstanding down. We think that is an aberration and should come back to a more normalized level that we have experienced over the past several quarters, starting with the next quarter.

Vivek Arya - Merrill Lynch

Thank you.

Terry Glofcheskie

Next question, please.

Operator

Thank you. Our next question comes from the line of Inder Singh, Prudential Securities. Please go ahead.

Inderbir Singh - Prudential Equity Group

Thanks very much. It sounds like you had a pretty solid revenue quarter there. I know that you are not commenting on revenue guidance beyond the December quarter, but it sounds like you are still hoping to see stronger growth this year than a few of your peers. Are you seeing a pause in spending at all in some of your customers, as your peers might suggest? Do you have the confidence that you can actually continue to see more robust growth than your competitors over the next few quarters, especially as some of your customers and your competitors consolidate?

Mike Zafirovski

A couple of comments. First, there has been a noticeable increase caution by carriers over the last two or three quarters, and I think that is pretty consistent. Enterprise is on the other side, much more pragmatic in terms of looking at enterprise spend to drive cost savings and very specific increases in business value, so from that perspective, we are not seeing the slowdown on the enterprise side.

Your question for our Q4 trends, we are seeing good activity within enterprise customers. I also should point out that our backlog at $5.2 billion is among the healthiest in the industry. Relative to our revenue, that percentage is very, very high. We do expect to complete some of the requirements of software, which will enable completion in recognition of those revenues, so the combination of those items do give us confidence for the fourth quarter.

As I said, as much as I hate to, we will not be making comments on 2007 revenues at this time.

Terry Glofcheskie

Next question, please.

Operator

Thank you. Our next question comes from the line of Chris Umiastowski, TD Newcrest. Please go ahead.

Chris Umiastowski - TD Newcrest

Thank you. First of all, Mike, a clarification on the UMTS business. When Paras was asking a question earlier about what that would do to your revenue, I just want to make sure we all understand this. When you sell your UMTS business to Alcatel, are you really going to lose all of the revenue associated with that business, or are you just going to be ending up using them as a supplier for some of the contracts you are still involved with and still generating revenue with a different supplier, being the portion of the cog that you realize?

Mike Zafirovski

Chris, the UMTS access, and I want to clarify it as UMTS access, we have not given any magnitude of the amount, but Paras’ normal, his number is too far off. Those revenues will go away. We are transferring the customers. We are transferring the employees and of course, the future revenues associated with UMTS access.

Peter Currie

The only extension that I would put on is relative to our LG Nortel joint venture in Korea, there will be an ongoing relationship between that entity and Alcatel to service certain elements of its market, and that is part of what is being discussed right now.

Chris Umiastowski - TD Newcrest

Okay, and then the question is LG and PAC revenues. In total, I think, Peter, you said $86 million for the quarter. It still seems shockingly low, considering that when you guys bought the PC business, you indicated the business was running around $300 million. It seems to suggest that LG is contributing almost nothing, which does not seem to line up with some of the contracts you guys have announced, such as the UMTS contracts, as well as some of the IP video phones that you have sold into Telefonica, for example. What is going on there?

Mike Zafirovski

Revenue recognition. The U.S. GAAP is much more specific, much tougher to recognize revenues than many other GAAPs, from international GAAPs. We do have, part of our backlog is in fact shipments which we have made in Korea, in other places, and we are in the process of -- the timing for our completion of the requirements, software and otherwise, and we do expect Q4 for the LG revenues to be meaningfully higher, if we complete the tasks that there were in Q3.

Chris Umiastowski - TD Newcrest

Okay, so the comments you gave on the Q2 where you said the second half will be stronger due to revenue recognition of these businesses, you are still saying that is true, but it is mostly weighted into Q4? Is that correct?

Mike Zafirovski

Correct.

Peter Currie

That is correct. Let me make one amplification on that. One of the big challenges that we have been pursuing this year, relative to LG is the conversion of their accounting to U.S. GAAP, so just to Mike’s point, it is challenging, it is essential that we do that, of course, to be fully compliant with U.S. GAAP, and we are doing it, but it does not necessarily reflect the vitality of the underlying business, which is actually quite strong in the LG/Nortel joint venture.

Terry Glofcheskie

Thank you. Next question.

Operator

Thank you. Our next question comes from the line of Brant Thompson, Goldman Sachs. Please go ahead.

Brantley Thompson - Goldman Sachs

I was wondering if you could give an update on the relationship with Microsoft and some of the enterprise revenue targets that you had spoken about in the past in terms of where we are with some of these initiatives? Thank you.

Mike Zafirovski

The Microsoft alliance is proceeding very, very well. We have a team jointly working in Redmond trying to develop and accelerate the development of unified communications. We will be working very cooperatively between our go-to-market teams and Microsoft.

Having said that, the incremental revenues from unified communications, they will not be until the latter of 2007 and 2008. The excitement is that there is a clear road map the two teams are putting together. It gives increased confidence to customers for our ability working, of course, with Microsoft to show a clear path to next generation unified communications. That is helping immensely in opening doors to discuss current applications.

What we have said is that we do expect the revenues, mostly on the solution side, to be up $1 billion over three years, and everything which we have seen to this point in time confirms those initial expectations.

We will be discussing those at the November 15th meeting, and we will also have a couple of breakout sessions on November 16th, which you are going to be hearing about. This will be one very specific session for interested investors to go and kick the tires, if you will. We are doing that to increase transparency and to educate investors and analysts for the key developments within Nortel.

Terry Glofcheskie

Next question, please.

Operator

Thank you. Our next question comes from the line of Phil Cusick, Bear Stearns.

Jonathan Siegel - Bear Stearns

Hi, this is Jonathan [Siegel] for Phil today. Thanks a lot of taking my question. I wanted to ask -- first, I wanted to -- why can’t you just reconcile active gross margin again with a couple of statements that were made during Q2. There were statements made that sales from North America would be greater gross margin and that also the enterprise would have greater gross margin impact. Both of them on Q3, and I guess I am trying to understand if there is a shift in terms of the market trend or the pricing for those two areas?

My main question is really on guidance, in terms of understanding why it is moderated some for the revenue, especially with still a large deferred revenue and backlog. Thank you.

Mike Zafirovski

A couple comments, Phil, thank you very much. The revenues in North America for Q3 are up 9% relative to 17% for overall Nortel. I also indicated in one of the charts that deferred revenue recognition was $170 million I believe, but that actually was helped. Asia and Europe were up more of a positive and there was actually a negative impact on North America in Q3. In other words, the deferred revenue balance increased in North America. So those two items are supporting the comment that we had a negative regional mix in Q3. The second question was what?

Phil Cusick – Bear Stearns

The second part of my question was really with the moderation of revenue guidance, why that's taking place, especially with still such a large current amount in the backlog and the deferred revenues.

Mike Zafirovski

We said high single-digits before, now we are saying mid to high single-digits. Our ability to fulfill the contract requirements to allow the income recognition and times the order doesn’t get finished prior to December 31 or early part of 2007 are adding to that level in qualification which I thought was appropriate to provide on this call.

Operator

Your next question comes from Ken Muth - Robert W. Baird.

Ken Muth - Robert W. Baird

Hi, Mike, as you talked about your Microsoft relationship going forward in 2007-2008 -- and maybe this goes back to Peter then -- how will this impact gross margin and operating margins? Will it have a positive effect on this, a negative or kind of no change?

Mike Zafirovski

At the 50,000 foot level, we expect double-digit operating margin from all our activities. Services by definition has a lower gross margin just because it does not require the level of an R&D investment. We are pretty comfortable that our gross margin, even for the fact we will be having more services has to be above 40% and the fact that for each one of our activities fully costed, including corporate, including accounting, needs to be in double digits. So once services really takes off in the latter part of 2007/2008, that in itself will be a negative impact on gross margin which we're looking to more than offset with other activities in the Company.

Peter Currie

In terms of the impact of the Microsoft alliance, next year as Mike indicated, we're probably not going to see much in the way of revenues next year and the associated costs won't be material so it won't have any impact. I'm not anticipating any real impact on our economics next year. 2008, it's a little early to speculate on that but as Mike indicated, we're launching an accelerating array of programs to bolster both our gross margin and our operating margin, so our anticipation, as you will see, is continued improvement in both those categories over the course of the next two years.

Mike Zafirovski

Also I should point out that my comments were very indicative of services in general. We do expect services to start growing next year and we do expect, though it will not be a particular unified communications products for the early part of 2007, we do expect the communications and the excitement and the process of starting to convert customers to unified communications -- we have a very long list of customers, very significant customers that are very excited to be part of the initial list of companies to transition to unified communications. So there's robust activity which we expect to only pick up going forward.

Ken Muth - Robert W. Baird

A quick housekeeping question Peter. What will be the shares that will be added for the convert?

Peter Currie

You're talking about the 2008?

Ken Muth - Robert W. Baird

Yes.

Peter Currie

Convertible?

Ken Muth - Robert W. Baird

Yes.

Peter Currie

It's already in our share count.

Ken Muth - Robert W. Baird

Okay. So there's no change to that?

Peter Currie

No. Just on that for a moment just for clarification, the debt that is convertible comes due September 2008 and there's a $10 per share strike price on that, so perhaps conversion into common shares is academic.

Ken Muth - Robert W. Baird

Okay.

Mike Zafirovski

It is 9:00 but I think with the level of questions that we will take four more as part of our increased transparency commitments. So four more questions.

Operator

Your next question comes from Jiong Shao - Lehman Brothers.

Jiong Shao - Lehman Brothers

Thank you very much. First, really a clarification. Peter, I was wondering, could you please break out the $43 million benefits into the line items for SG&A, R&D so if we want to do pro forma -- and the COGS -- so we can see how that impacts into those line items, if you can that would be great.

A question for Mike. I know you say you don't want to comment on the '07 revenue growth but if you look at it over the next two years, looking at your four businesses: the mobility and converged to core, enterprise, metro, and then services, which area or which areas do you think are going to be leading growth? Thanks.

Mike Zafirovski

First the R&D obviously we are still going to be at 15% by mid-2007 of course with the R&D line. G&A, the 500 basis points is over a couple years. And of course, G&A is part of the SG&A. By the way, we do believe our sales and marketing expenses are appropriate. We're not necessarily spending the money well there, so between Lauren Flaherty and our regional managers we'll come up with a much more effective way of spending our sales and marketing dollars, but the G&A of course will be within SG&A. Cash flow is obviously cash flow.

Peter Currie

Your question was I think about the $43 million that we highlighted as one of the significant impacts in the quarter ?

Jiong Shao - Lehman Brothers

Yes.

Mike Zafirovski

I thought he was asking for where is the savings coming from?

Peter Currie

He was. I'm just looking back, Mike, to the first part of the question because you answered the second part.

Jiong Shao - Lehman Brothers

The second part actually was on revenue, sorry. The revenue growth for those four business segments, which area you expect to see the greatest growth, or which areas?

Peter Currie

Let me just close off on your original question on the $43 million. That was associated with the restructuring of our pension plan that we announced in June of this year and there is, as you may know, a curtailment benefit associated with the structural change. Your question was how much of that flows to R&D and how much of that flows to SG&A. It's about two-thirds, one-third to R&D, SG&A rough numbers and that of course reflects the demographics of our population in R&D as well.

Jiong Shao - Lehman Brothers

Okay, that's very helpful. Mike, on the revenue question, sorry. Just to clarify, I was wondering can you comment on the revenue for next year by segment? Thanks.

Mike Zafirovski

We have a pretty good team within Nortel but it's not very appropriate to have internal competition so hopefully the people – I am not going to mention just one or two -- will try to prove me wrong, including the very energized presentations they will give you next week. But what we've said is that we're looking at services to significantly increase as a percentage of our total Company, so it could even be up by 50% or 100% in the next five years from a current 20% which is services. We believe we will be growing nicely.

Second I would say enterprise. We said the enterprise space is the one where we believe we have a great customer base. We have very good products and there has been more of a sales and marketing efforts which were not at par, we are trying to address it.

Again, the Metro Ethernet business is probably as energized of a company as any part of Nortel. The carrier business, MCCN of course was our decision to exit UMTS. It's taking us away from the single largest area of growth, but we do believe that our CDMA position as well as WiMAX, we do believe is a nice way for us to grow, particularly since you're expanding the view to 2008.

So we're not naive to the challenges of the marketplace but we feel very good for the people which we have as well as the capabilities and I'll let you judge the presentations next week. Thank you.

Jiong Shao - Lehman Brothers

Thanks, Mike. That's helpful.

Operator

Your next question comes from Ehud Gelblum - JP Morgan.

Ehud Gelblum - JP Morgan

Hi, thank you guys. First a clarification and then a couple of questions. The Q4 guidance that you gave you said UMTS sale to Alcatel will be completed at the end of this year. Did you account for any less UMTS revenue in Q4 in your guidance ? That was just a clarification.

I am trying to understand a little bit more about your comments, Mike, on the market pricing being more aggressive and then everyone else's margins have come down. Lucent’s actually were up 300 basis points quarter over quarter, I know other people’s kind of moved around in different directions. So I didn't see a particular trend. I was wondering if you could drill down in the specific areas where you saw worse pricing and other competitors also saw the same type of environment.

And Peter, if we could drill down a little bit more on the OpEx trends. I understand the formula going forward to bring OpEx under control; but this quarter, revenue seemed very strong for a number of reasons, some of which being revenue recognition, others being CDMA. I would have expected a little more leverage in the OpEx line. I was wondering if some of the operating expenses that we saw this quarter, were they actual real spending that actually happened, as you took advantage of the fact that you had more revenue? Or were they sort of artificial matching prior expenses to prior quarters or prior year revenues that happened to fall in this quarter in a matching allocation expense recognition type of thing. If you can clarify that, that would be great as well.

Mike Zafirovski

Just a quick comment on the gross margins, I mean, obviously there's different ways of evaluating. My comment, Ehud, was based on year over year. Lucent was down 200 basis points and they buy 100, some 300 basis points; Nokia Networks, 300 basis points, Motorola 400 basis points. Again, I was simply looking at the year-over-year gross margin trends and said we're stabilized 38% to 39% and we're not happy with it. There us a pretty high resolve and I think it will pay off for us to be able to move the business forward.

Peter Currie

Let me comment on two things. First is your question on guidance relative to the fourth quarter, and I'll clarify: our target, our goal is to close the transaction on UMTS access with Alcatel in the fourth quarter and we're pulling out all of the stops to do that. Of course, as all would know, you can never judge these things precisely but that's what we're anticipating. We don't, as you know, give individual product line revenue guidance by quarter, so I'm going to refrain from doing that at this stage, but we're not anticipating any specific changes to the trends we've seen this year on a product-by-product basis, and I won’t go further than that.

In terms of OpEx in the quarter, you said you thought that the revenues were up nicely and you may have expected the OpEx rate to be down a little bit more than it was on a year-over-year basis. Well, we have a number of programs underway right now to reduce our operating expenses and I mentioned those in my comments. You also know that we've been encountering on a year-over-year basis, the dynamics of foreign exchange and I talked about there. There were no opportunistic spending programs undertaken in the quarter. That's not the way we operate and there was nothing unusual in terms of matching in that respect either.

So, we tried to be as straight up as we could be in terms of what transpired in the quarter. We're seeing a good trend developing there and it's realizing the programs we have underway and we're now in the process of further accelerating those programs so we'll see even more traction as we go through the next several quarters.

Mike Zafirovski

Peter, you did indicate that we did have one-time expenses from financial and business transformation in the quarter which are not restructuring.

Peter Currie

Correct.

Mike Zafirovski

That's adding along with foreign exchange.

Peter Currie

That's correct. There are always puts and takes but none of these, Mike, are out of the norm. There's no dynamic that hasn't been in the system the last couple of quarters.

Ehud Gelblum - JP Morgan

Great.

Mike Zafirovski

Since the last two questions were probably five in total, let’s just have one more and we appreciate the robustness of the questions from our audience.

Operator

Your final question comes from Mark Sue - RBC Capital Markets.

Mark Sue - RBC Capital Markets

Thank you. Just made it. Mike, broadly speaking, are the large wireless carriers less inclined to do business with Nortel in your negotiations? Do they bring up the size and the market share issue? Are there instances where major carriers are now more inclined to work with the larger equipment vendors?

Along those lines, Mike, if you could just tell us about your work with shrinking your customer list?

Mike Zafirovski

I was in China last week and the reception was off the charts, as it has been in every country, every place I've been to. Number one, when we made a decision on UMTS without exception, every single customer understood and said whenever you are ready, particularly the people on the UMTS side, to have product solutions, we're there to listen. On WiMAX again there are obviously quite a few current carrier customers looking at us. So the short answer is the door has not been closed. To the contrary, people would like to see the kind of innovation that has traditionally been at Nortel.

I'm not naive to the fact that everything else being the same, people are going to stay with their existing customers. Of course, you do the same with employees, you do the same with your sites and everything else being the same, you would not want to change. So the challenge for us it is to make sure that as we stick with customers, as we come up with the new solutions, as we are driving the business going forward, we do in fact have something that is going to be of a particular advantage. We understand that and are pretty comfortable based on relationships that Nortel has had with the customers or personal relationships which have been based on respect and leading up to the commitments that the door is wide open for Nortel short term, mid term, and long term.

Mark Sue - RBC Capital Markets

Okay that's helpful. Good luck.

Mike Zafirovski

Thank you very much for listening today and for the robust Q&A. The IR team is very much available to answer any questions and we look forward to a very good discussion on November 15th. You are going to see most members of the management team both on the day of the presentation and all of us are going to be there the night before. We will have a number of break-out sessions for areas where a number of you have expressed a particular interest. Thank you and we'll speak with you soon.

Operator

Ladies and gentlemen, that does conclude the conference call for today.

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Source: Nortel Q3 2006 Earnings Call Transcript
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