Nortel Networks Q3 2007 Earnings Call Transcript

Nortel Networks Corp. (NT)

Q3 2007 Earnings Call

November 6, 2007 8:30 am ET

Executives

Janet Craig - Vice President, Investor Relations

Mike Zafirovski - President and Chief Executive Officer

David Drinkwater - Interim Chief Financial Officer

Analysts

Edward Schneider - Charter Equity Research

Vivek Arya - Merrill Lynch

Chris Umiastowski - TD Newcrest

Mark Sue - RBC Capital Markets

George Notter - Jefferies & Company

Brant Thompson - Goldman Sachs

Ehud Gelblum - J.P. Morgan

Inder Singh - Lehman Brothers

Gus Papageorgiou - Scotia Capital

Phil Cusick - Bear Stearns

Ken Muth - Robert Baird

Nikos Theodosopoulos - UBS

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Nortel Networks 2007 Third Quarter Results Conference Call. During the presentation today, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded today, Tuesday, November the 6th, 2007. And I would now like to turn the conference over to Janet Craig, Vice President, Investor Relations. Please go ahead.

Janet Craig

Thank you, operator, and welcome to Nortel’s third quarter results conference call. Before I turn the call over to Mike Zafirovski and David Drinkwater, I have a few comments to make. First off, I wanted to make sure you are aware of our Fireside Chat next week at our head office.

If you are interested in coming and you haven’t RSVP'd yet, we have limited space available, but it is going to be a highly interactive, and highly educational event next week, and we look forward to seeing you there.

Secondly, we're going to be allowing one question per caller, to ensure more people have an opportunity to ask a question during the call.

On slide three, please note that certain comments made in today's remarks may be characterized as forward-looking under the United States Private Securities Litigation Reform Act of 1995, 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 Nortel's filings with the United States Securities and Exchange Commission and with Canadian securities regulators, including Nortel's annual report on Form 10-K. Also, please note on chart four, the non-GAAP measures comments.

And at this time, I'll turn the call over to Mike Zafirovski.

Mike Zafirovski

Thank you, Janet. As you can tell, we have a new sheriff in town in the investor relations area, and thanks to many of you, on a very good feedback, which you have provided to me on Janet's contributions already in her short tenure at Nortel, but welcome to the call this morning.

We're pleased with our financial results and with the accomplishments this quarter, and we are confident that we are going to be able to deliver meaningful operational and financial improvements in the fourth quarter of this year, in 2008, and beyond.

Also, we should point out that you'll see some additional disclosures to our slides this morning, including operating margin by business, as we continue to increase our transparency to the Street.

I also want to take some more time this morning to -- in the kickoff -- to paint a picture of how I see the business and our performance. Part of this is in response to questions that many of you have raised or written about in the last number of months.

So, let me start with page number seven -- our continued execution against strategy and business model. We delivered solid results in a challenging environment. Orders adjusted for the UMTS disposition, and were actually up 9% in Q3, 5% on year-to-date basis, with a significant customer wins -- small, mid sized, and large customers -- in the targeted areas. I do think this order sign bodes well for our portfolio, shooting some of the questions on the power of the portfolio in our investments.

Revenues were down 2% year-over-year, actually up 2% adjusted for UMTS. Sequentially, we are up 6%, and we did have some issues in a transition with CDMA manufacturing center, which did impact our CDMA volume by about $45 million, and I'll make some additional comments when I am discussing the carrier business.

On a year-to-date basis, three of the four regions are actually up, versus last year revenues, and one region is flat; so good performance, globally. Our backlog continues to be very strong, at $5.1 billion, flat to last year, and we are very proud of the double-digit productivity improvements, which are driving gross margin, directionally. And, for your information, our productivity was in the 3%-5% range between 2001 and 2005, with 9% last year, and it's up to healthy double-digits this year.

Let me also make a couple of comments and perspectives on deferred revenue. Lots of questions in the last call, lots of write-ups and speculations; so, hopefully, this will put some additional perspective in the facts. First of all, deferred revenues have not had a significant impact, either in the third quarter of this year, on year-to-date basis in 2007.

As you can see in the notes, the decrease in the deferred revenue in the third quarter is $88 million. This compares with a decrease of $166 million in the third quarter of last year. So, based on that, deferred revenues did not have any favorable impact, if anything had a slight -- would have had a slight -- compared to previous year's slight negative.

Year-to-date basis $85 million decrease in deferred revenue balance, compared to decrease of $35 million, so slight positive on a year-to-date basis. And I actually had a couple of clarifications. We have said that our deferred revenues are higher than what they should be for a business of our size compared to competition; this is based on how contracts have been written. We keep adding additional activity which adds different revenue, so it is difficult to anticipate the movement in deferred revenues. But, over time, we do expect that deferred revenues to be going down. And there is some impact on a business-to-business basis. For example, our enterprise business has been helped, and our Metro Ethernet business has been “hurt on relative comparison basis”. We manage those things internally, but do think it was important to highlight the fact that deferred revenues had no positive impact in the third quarter; minimal positive impact on a year-to-date basis.

On to the next page. We are moving to a competitive cost structure. We get it, and unless you control your cost structure, it's very difficult to control your own destiny. The business transformation projects are making very good progress. Some of them we are reinvesting back in the business.

As I made the comments on double-digit productivity, material, labor, and overhead is driving significant enhancement in gross margins. And, by the way, I'll have some additional comments in the following pages in terms of [stairs], which is a business model. But that is driving a very significant improvement in gross margin. R&D is also on track, both inclusive of absolute dollars percentages and where we're investing that, I'll make some additional comments later on.

We have work to do on SG&A. We know that we have made that comment as part of the reasons for -- part of reasons as to make sure that we have the systems, the process in place to deliver on the financial remedial plans with the commitments made to the SEC and OSC.

We are making some investments in sales and marketing, but there should be no confusion with anyone on this call; my team understands it, the employees understand it. We will be competitive in everything which we do, SG&A--very specifically--included.

We do expect to have a very solid fourth quarter, and this has been adjusted for the recent announcements by large North American carriers. So, we have brought down some of our expectations for Q4. We still believe this is a very, very solid fourth quarter.

Our revenue is to be approximately flat compared to 2006. If you adjust for UMTS, actually 3%-4% increase, and we have provided a range of plus or minus $100 million with this guidance. Gross margin as a percentage of revenues, we expect to improve slightly compared to the third quarter of 2007.

Deferred revenue releases, we expect to be greater than $152 million, which were released in Q4 of last year and operating margin as a percentage of revenues to be approximately 10%, with an expected range of plus or minus 125 basis points, based on the level of revenues.

As we have discussed before, integrity renewal, it’s getting a hold across the company and we are very pleased with the SEC settlements that was completed and we're putting that chapter behind us without at all losing the passion to drive integrity and compliance as a forefront of the strong foundation which we're putting in for Nortel.

I'm very pleased with our leadership appointments of our new CFO, Pavi Binning, who’ll be starting week – actually, next Monday. And also, Joel Hackney, the new President of Enterprise Services, and Joe Flanagan, as the Senior VP of Global Operations.

And last, and certainly not least--arguably the most important--employee satisfaction has been the highest in two years. The employee satisfaction--every six months--not world class levels yet, but to have employee satisfaction go up obviously, you know our stock price has been…the employees do believe what the company is aiming to accomplish; they realize the progress, and also, they believe in the future of this company.

Page nine, revenue against key financial indicators Few of you have asked me what is most important to us. This is how we measure our business, revenues, gross margin, operating margin, and operating cash flow. This is simple factual information of the progress, which we have made since the second half of 2006.

As I have told a few of you, I really believe that's where the momentum started, the first half of 2006 was rather difficult, we had very significant restatement and the significant shock to the system. But if you are looking at second half 2006, revenues up 13%, gross margin up 28 basis points, operating margin 303 basis points, and operating cash flow up almost $0.5 billion versus the second half of 2005.

Our nine months year-to-date 2007, revenues UMTS adjusted, up 2%, gross margin up 300 basis points, operating margin up 380 basis points, and operating cash flow up $48 million relative to the cumulative nine months year-to-date of 2006.

We are pleased with those trends. We believe we're the only company that actually has a positive traction in operating margin and gross margin expansion, second half 2006 and 2007. And want to assure you not for a second we're losing the sight of where we're trying to go, which is our next page.

This is the business model, which we have articulated. Shows the actual 2006, and the long-term goal of 43% gross margin down to 13% operating margin, and next to it we're showing the actual Q3, 2007 and Q3 year-to-date 2007.

We are making progress. Gross margin has been a very strong story as we are moving toward that target, also very pleased with the progress in R&D. As I said before, we are refocusing also how we're spending that money.

As we have communicated, until 2006, full 55% of the R&D spend was in legacy products. Right now that number is down to 20%, and we have 80% of our R&D spend being into current and emerging areas. And we feel good about some of the initial decisions, and some of the initial changes in that R&D spend.

We are disappointed at the current spend level in SG&A. Part of it has been by design. We are increasing our investments in sales and marketing in terms of a go-to-market, in services and enterprise, and we're starting to see the results. But as I said there should be no confusion, we will be driving SG&A to be at competitive levels and provide more color commentary at the Fireside Chat on November 15th and of course when we provide guidance for 2008 at the Q4 earnings call.

We continue to believe that our long-term operating margin target of 13% is achievable. That's how we're driving the business. And although we're not providing guidance for next year, I think it's safe to say, this environment has become tougher. So, as we move in to 2008, our target is to continue to generate significant operating margin expansion, which most likely will be in the high single-digits for us in 2008. Again no official guidance; I know that’s been one of your questions. We certainly have not finished the budgeting process, but I know there will be a meaningful operating margin expansion in an environment that arguably has become tougher, but we're comfortable with the R&D investments, which we are making and the position with our customers.

So, those were rather long intro, but I was hoping to provide you with some of the questions, which answers with many of the one-on-one discussions; and let's move on now to the more regular details, which we provide for the business, and I will move rather rapidly through this.

Page 11, summary of orders, backlog, and deferred revenues. Orders, excluding UMTS, up 9% Q3, 5% year-to-date basis. Book-to-bill is below 1, but it's very typical for us in the third quarter. Book-to-bill compares favorably to where we were last year, both in Q3 and year-to-date basis. We discussed the deferred revenue releases already and order backlog is quite strong at $5.1 billion.

On the page we are highlighting some of the areas of strong growth. CDMA North America continues to be very strong order wise, also Voice Core in Asia and North America. Optical continues to be strong, including very significant Tier 1 players like Verizon and BCE and Tier 1 players in Asia. Increases in Carrier Ethernet, and also the LG joint ventures continue very strong.

Page 12, we have the financial highlights, I'd say that's covered quite a few of those already. Our revenues, UMTS adjusted, up 2% current quarter -- I mean down 2% current quarter -- 2% up on a year-to-date basis. We discussed the very significant enhancements in gross margin, the highest in nine quarters and operating margin of 5.0, the highest since 2004. And we are not seeing top-line growth as we discussed, but I'm very comfortable with the investments which we are making and we're seeing evidence in our orders. And we are seeing good growth in enterprise, in traction, the other key areas, which were identified as important to us, Next Generation Optical, Carrier Ethernet services and increasing activity in WiMAX.

Let's go now by business discussion, starting with the carrier networks. Obviously, this is the profit engine for us, both in terms of profits and also fueling or funding our future growth. Improved profitability over 2006 is very significant and, of course, this is not pricing driven, the strong productivity enhancements in all of the areas, strong productivity in CDMA, almost 50% productivity in GSM. The team has done a fantastic job driving that portfolio, productivity in Carrier Voice over IP and of course the divestiture of UMTS, which was not profitable.

We did also see good demand for CDMA and slight market share gains though did have a negative impact in the third quarter with some teething issues as we move from one CDMA house to another CDMA house, and the goods cost is about $45 million revenues in Q3.

We do expect to recover this in the fourth quarter. We are working to rectify the cause of the missed revenues, and we do expect our Q4 CDMA revenues to be above last year, including second half CDMA revenues to be above second half of the previous year.

GSM/UMTS is down 29%--the fewer. If you adjust for the UMTS disposition, GSM is down actually only 3%. We feel very good about the traction, which we have here. Good rhythm on getting new products out [Evol Edge] very specifically, and also the productivity which the team has been able to drive. Circuit and packet core down significantly primarily to significant revenue recognition in third quarter of 2006 at Tier 1, North American player. And, of course, the TDM market continues to decline. A comment here--in the fourth quarter, similar to CDMA, we do expect circuit and packet voice to be up in Q4, lots of them, activity with customers, we think will be evident with our Q4 results.

WiMAX, we have three combinations of wins and trials, including one in Taiwan, and again, we do expect WiMAX story to start getting traction as 2007 winds down, as we're looking at 2008. And overall, we're looking at carrier business to continue to develop a franchise in WiMAX. We're well position for long-term evolution. We have a very strong position of voice over IP, Fixed Mobile Convergence and in applications.

Our Enterprise solutions, page 14. Strong revenue momentum, it is the fifth consecutive quarter of double-digit growth. As you can see data networking is strong. And as you may know, we have increased our R&D from $300 million in 2005 to almost $400 million last year and will gain additional meaningful increase in R&D spend in 2007. So this has been paying off, top line, including data. We're seeing IP voice growth in pretty much all of the [theaters] in EMEA, CALA and Asia, also very strong performance by LG. And as I mentioned early in the call, there is also positive impact of deferred revenues on enterprise and I'll make some additional comments for revenues on Metro Ethernet.

But, additional announcements, like our position with Microsoft on the OCS release, the announcement with Dell last month and the appointment of Joel Hackney as the President of this group, I think should give you additional confidence of our conviction of developing enterprise to become a anchor business for Nortel.

The operating margin improvements are results of enhanced productivity. They improved 462 basis points, even more on a year-to-date basis. Obviously profitability is very low, as a result of the significant investments. But again, we are comfortable with the businesses, and we see continued growth from R&D go-to-market initiatives, alliances as well as market channels.

I should point out that we do not expect to be driving this kind of organic growth on a continual basis, but we'll continue to invest in this business. We're comfortable that we are positioned well.

Our Global Services is another key focus area for Nortel, an area where we aim to transform ourselves from a hardware play in to a services and solutions play. Revenues, excluding UMTS, were up 6% in the quarter, 2% year-to-date basis. Growth in Asia and CALA, but also growth in our focused areas of network support and managed services, also about lower sales in products related network integration services.

Operating margin improved for the quarter as mix in productivity gains helped drive our gross margins significantly, which is offsetting some of the increased go-to-market and development expenses, which we are putting into this business.

We do have nice traction in key new products, multi-media services and hosted contact center. I am bold enough to say that people, -- we have not done as much as we have job marketing our telepresence.

The people who have seen it, including Tier 1 Enterprise customers in North America, truly believe that our telepresence solution, which is a services system integrator working with partners, is the best one in the market, [both in] the capability and price points, and we will be becoming more active in promoting that terrific solution.

Looking at the fourth quarter, we expect to grow revenues in the low to mid-single digits year-over-year. In the last business, Metro Ethernet Networks, optical is flat, 1% down year-over-year, 7% up on a year-to-date basis. We are seeing a significant increased traction in Next Generation Optical solutions, and growing the business in the focus areas. I should say here, that we have a negative impact of deferred revenues, but again, we will be [measuring] the deferred revenue impact by business in totality, but we are seeing a very good progress in Next Gen Optical.

Now we have 13 of the 20 service providers. Nice momentum in Metro DWDM, number 1 market share and Q3 is the highest quarter for the business and very good traction with the OME's 6,500 product. Key wins in Europe, Asia, and North America, including a deal with Verizon. The dealer networking is impacted by the decline of legacy MS WAN market and also deferred revenue recognition in 2006.

Carrier Ethernet market is gaining momentum. We have 30 new customer wins and we expect to start seeing a real traction in Carrier Ethernet revenues beginning in 2008. Operating margin is about breakeven, impacted by lower revenues, some price competition, and also some increased investments. Next Gen Optical and Carrier Ethernet, but we expect Q4 revenues to be flat over a strong Q4 last year, and you'll see significant increase in our profitability in this business in the fourth quarter.

Our geographic revenues, I've touched upon most of the key points already on the call. But I think it is important to provide a highlight of what's happening at regional level. On a year-to-date basis, as I mentioned before, we are flat in North America, and up in all the other regions in the world and, this is, I think, a meaningful accomplishment, especially considering that UMTS is the fastest growing segment in wireless, and we're not playing there.

You can see in the charts what’s driving the activity on a region-by-region basis. I'll just take a couple of minutes. I need to highlight some of my observations from my travels--they have been extensive, and continue to be extensive in just the last couple of months. I spent a week in India. We have an outstanding traction in that market, not only working with our partners and with our team, but great progress in our enterprise business—CAPA--being the exclusive provider at the Bombay Stock Exchange, winning us terrific, all-in deal, included win at the Bangalore International Airport, again [seeing as we turned] down into growth in significant, significant double-digits.

Travels in EMEA, both in Western Europe, but also Russia and the Middle East--Darryl Edwards and the team are doing a terrific job driving next generation fixed mobile convergence, next generation networks. We do see quite a bit of traction in that area, where many people thought we were not going to be able to be relevant after we sold the UMTS business.

Terrific win at WiMAX in Taiwan. I was in Australia, also in China, a couple of weeks ago,and lot of traction in enterprise, and also, on the carrier side where services is progressing well. North American market has had some headwinds on the carrier side, but we are very well positioned with virtually all of the carriers.

We see strength in optical, strength in CDMA, and we are taking a very strong position in voice over IP, as we are driving not only IMS, we are starting to drive applications and nice momentum in CALA, as well. So, I'm sure there’ll be some questions in the Q&A period, but just wanted to provide that perspective, as well.

And my last page, before Dave discusses the other elements of the operating statement--the gross margin--the numbers speak for themselves. Productivity improvement and commitments to take non-strategic low-margin -- to walk away from non-strategic or low-margin contracts are paying off.

We have actually here model 43% gross margin, and I'm not sure if this is steady or not, but again, I do want to say to our team and to the suppliers who have worked with us: job well done, to this point in time.

Let me hand it off to David, right now, to walk through the rest of our financials and the balance sheet. I will come back to close it off and to take some Q&As. Thank you.

David Drinkwater

Thanks, Mike, and good morning. Turning to the SG&A numbers for the quarter, as Mike has indicated, we are up year-over-year, $28 million, in fact, up as a percentage of revenue. We are making some progress through our BT initiatives, but it's not enough at this stage. We did get a reduction through the disposition of UMTS, but in the SG&A space it is not nearly as significant as it in R&D. And these improvements have been more than offset by some sales and marketing investment that Mike made reference to. We have increased the go-to-market emphasis in enterprise, as an example.

We have also had some negative impact from the foreign exchange movements we have seen over the course of this year. We have a renewed focus on SG&A and we do see opportunities to bring down SG&A over the next year or two, including in the finance area.

Turning to R&D, as Mike has indicated, we continue to make very good progress. We now have line of sight on our business model target of 14%-15%, down $58 million year-over-year, and as Mike pointed out, perhaps even more significant than getting the number down, we were also able to shift within that to allow us to invest in new initiatives and get the mix right between new and old products.

Turning to operating margin, another good news story from our perspective and this clearly reflects the impact of our BT initiatives, year-over-year up $70 million, or over 275 basis points. A comment I’d make on this, just in the context of FX, because we have seen negative FX impact on some of our costs, we do get a pick up on FX on the revenue side, so when you look at it at the overall impact at the operating margin level, it's relatively flat. Year-to-date, the net impact of FX has been about 5% positive on our operating margin.

Turning to cash and cash flow, you'll see the three metrics we typically provide, and we have added a fourth one, which is the cash conversion cycle, to help you see the overall impact of those three metrics, and you'll see that year-over-year we have improved the cash conversion cycle by 14 days, and that has a significant impact on our ability to enhance our working capital.

Cash flow from operations was an outflow this quarter, $139 million, driven in large part by changes in working capital, increased accounts receivable, as Mike indicated, with a lot of them in billing at the end of the cycle, and therefore unable to translate into cash in the quarter. In addition we have been making increases in our inventory in anticipation of deliveries.

I would like to talk a little bit about some of the other items in the income statement just to give you a bit more visibility on that. So we go to the next slide, you will see that the other income for the quarter was significant. The two factors that are driving that large number are interest and dividend income of about $62 million and a foreign exchange gain of $67 million, principally around the Canadian dollar.

The minority interest was also up--significant performance from the LG joint venture, which is driving about three quarters of that $43 million. Just a couple of comments, in terms of looking forward into Q4. We did repay a little over $1 billion of our debt at the end of Q3, and therefore, the interest income number will go down going into Q4. In addition, we talked at the last call about taking some steps to minimize the impact of the P&L from foreign exchange. We did put in place some changes but not really until the end of Q3, so the impact in Q3 was not as significant, and while there will continue to be the potential for some gain, given what the Canadian dollar has done in the period since Q3, it's likely to be less significant in light of what we have done at the end of the quarter.

Turning to a few other significant impact items; restructuring charges of $56 million, about $35 million of that is in connection with the 2007 plan, the FX gain of $67 million that I referred to. Another item that was larger than you might anticipate in quarter was the income tax expense. The largest component of that was a change to our deferred tax asset as a result of reductions in tax rates principally in the U.K., which results in a reduction in the deferred tax asset and a charge to our tax expense. We also had a gain on an interest rate swap in the quarter of about $14 million. One of our hedges in relation to our long-term debt is currently ineffective from an accounting perspective. It is effective economically, but the hedge accounting rules are quite complex and we're not yet able to get that effective, and that was a 14 positive swing this quarter--but a 14, approximately negative swing in the previous quarter.

Turning to the outlook, Mike did take you through what we now expect for the fourth quarter. And when you walk through that and translate it into the full year, we're calling revenue to be down slightly compared to 2006, gross margin in the low 40s, which translates into an operating margin as a percentage of revenue in the range of 4% to 5%.

So with that, I will hand it back to Mike for some final comments.

Mike Zafirovski

Thank you, David. Let me make this quick, I do want to get to Q&As But before I conclude, I do want to sincerely thank David for a terrific job he has done while “holding down the fort”, as interim CFO for the past couple of quarters. The finance function has continued to progress under his leadership, and is in good shape to hand over to Pavi, when he starts next week. And I certainly hope that Pavi has well-earned rest these last couple of weeks, because we need all of his energy to drive the business forward on the financial side.

I will not spend much time on this page of plan and framework, except to say that there are plans in place to be driving the short-term priorities. The six-point plan for long-term, value creation is progressing well, and there's an operating rhythm inside the company focusing on people and strategy, products and budgets. There’s a sequential process that is forming on the foundation, it's putting us in a position to grow and on the next page, we do believe we are mapping our strengths to high-growth segments.

The three areas of focus is transform enterprise--how to go from the old PBX world to world of IP, to unified communications to business optimized communications, and to people that will come to see us on November 15th, and we will provide some additional color on that.

Next generation mobility and convergence, we do have good technology, good contacts, and I think we have earned the right to sit at the table with most of the significant operators in enterprises globally to be discussing 4G, discussing fixed mobile convergence, applications and IP transports. When I say 4G, we include WiMAX in that, and of course a long-term evolution. And we're making commitments; we're making progress in services and solutions.

So, summary in closing, progress on the business model, targets [and] on the business strategy continues. Lots of work, lots of heavy lifting to this point in time, and we realize there is much more heavy lifting to do. The team is ready for that. I think there is a market momentum. I think the orders are the best indication of that. In key customer wins, we have highlighted some of those in the press release, and increasing strong partnerships.

We're learning how to partner better, I think, based on the market and what we have seen from everybody else, we do think that both our Q3 results and what we are showing for Q4, should give our investors the confidence that the management team is playing the cards which we have, playing them well, and obviously we're trying to improve the cards we have for the future, and there certainly is a passionate pursuit of making Nortel very relevant and to achieve superior results. Janet, back to you.

Janet Craig

Thanks, Mike. Operator we will now open the call for questions, but just as a reminder, we will accept one question per caller and as Mike said, there is a new sheriff in town, so please if you can keep it to one question.

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. The first question comes from Mr. Edward Snyder from Charter Equity Research. Please go ahead.

Edward Snyder - Charter Equity Research

Thank you very much. Good quarter, guys. Mike, this is obviously a margin story quarter here. Your gross margins were all above expectations. I would like to get more color on that. You mentioned that it’s productivity gains that are driving that. Is that that lower material costs or higher employee efficiencies? And how much more can we expect from either improvements in revenue or supply chain improvements and when will we see it filter down to SG&A? Because normally you’d expect operating margins to be the first to improve because it is something you can control, whereas gross margins has to be built in with redesigned equipment, so it is kind of been turned on its head here. So I am just trying to get some color on what we can expect from both of these? So are we topped out at gross margins and will the rest come from operating gains? Thanks.

Mike Zafirovski

Ed, thank you very much for that question. I mean, as some of you know, I have been in Boston and New York and a few places, seeing investors, and try to--even before their questions come up--and say, look, I understand the dilemma from the other side. Typically gross margin is the toughest thing to achieve. R&D efficiencies would be the next toughest to achieve, and theoretically, not theoretically, but most companies are able to get the SG&A first. Particularly the G&A part, you are right, has been upside down for us, in fact we attacked all three of them at the same time.

With respect to gross margin, we will come back to, at the next earnings call, as to what else may be possible in that area. We're not used to saying, well, we're finished in a given area, but we have had a substantial accomplishment on the material side, first of all. We were discussing the clean sheeting approach where we armed our procurement professionals with better tools to go and negotiate better. For example, in the first phase 1 of the direct material, the first $900 million, as we indicated, is much of a 25% savings there. We did also say it’s going to take some time because quite a few of those required our supplies to change factories from one to another quite often from a high-cost to a low-cost country that has traction also labor internally. We have a number of people serving customers and products directly. We have been able to drive significant opportunities there. So, again, we will provide additional color, but I would certainly not expect, based on current composition, for gross margins to be going down.

R&D, we like the 14%-15% area, it is going to be all about effectiveness. And yes, I'm thrilled that we have been able to go from 10% of R&D to new, new areas to 20%. None of it is going to be perfect, but the more chances, the scientist, the product John Roese is going to have, taking swings in opportunities, obviously the more opportunities for us to connect. And again, you'll get more color commentary on that in terms of where and how we're spending that very precious R&D asset.

SG&A, the biggest area is in finance; Dave knows that, the whole finance area know that. Quite a few of those costs have been external as we’re trying to get our remedial plans in place. So you'll see a meaningful decrease next year SG&A numbers but will not be finished until 2009.

I'm not trying to evade more specificity, but as I said we're not prepared to provide line-by-line operating statement, but needless to say we feel good with our progress in R&D and gross margin and rest assured that we understand the visibility and the disbelief in the SG&A levels and you'll see meaningful decrease in those in 2008.

Janet Craig

Thanks. Operator, next question, please.

Operator

Thank you. The next question comes from Vivek Arya from Merrill Lynch. Please go ahead.

Vivek Arya - Merrill Lynch

Good morning. Mike, my question is regarding the LG joint venture. It's been a very profitable for you, can you please give us a sense for how much the sales gross margin and operating margin have benefited this quarter from specifically that joint venture?

Mike Zafirovski

Actually, the gross margins within LG are actually lower than the gross margins for the company in total, but the revenues have been meaningfully up year-over-year. As you remember last year, we were not able to recognize most of the revenues in LG until the fourth quarter.

And as we have indicated before, based on the new contracts within LG, we have been able to smooth the impact of revenues. So, we'll see a negative impact, if you will, in the fourth quarter on a comparison basis. But in terms of the operating margin, to put in perspective, let's see I'm looking at the numbers here.

Gross margins, in totality, there's less than the total. Operating margin is higher than the average operating margin for the company, and the increase in revenues was over $100 million in terms of a Q3 this year versus Q4 versus Q3 last year, partially and mostly as a result of our ability to recognize revenues currently in LG.

Vivek Arya - Merrill Lynch

So if you look at your Q4 guidance, and then also the 2008 outlook that you presented, what I'm trying to get a better sense for is what is Nortel's core operating margin once you normalize for this joint venture structure that you have for LG?

Because if I look at Q3, the LG joint venture minority interest was $43 million. You put any nominal tax rate, and you get to say, roughly a $50 million operating income versus your total operating income of $134 million.

So, this is a significant impact on your operating income line. And I'm just trying to get a sense for that as you look at 2008 and you are giving an outlook of mid-to high or just high single-digit benefit margin, how much of that benefit is coming from just this LG joint venture accounting rather than underlying core improvement?

Mike Zafirovski

Couple of points--LG was there for a full year 2006. LG is with us for a full year 2007. And as I said, for totality of the year, we projected very significant Q4 results for the company, and LG would actually be a negative Q4, versus Q4 in totality.

I can assure LG is a core part of our company and I can assure you there will be a less than 10% of the overall improvements year-over-year, which we're going to see for Nortel 2007, versus 2006.

Janet Craig

Thanks Mike. Next caller, please.

Operator

Thank you. The next question comes from Mr. Chris Umiastowski from TD Newcrest. Please go ahead.

Chris Umiastowski - TD Newcrest

Thanks very much. I guess my question is really on the foreign exchange line items that you guys have reported. I want to see if you guys can spend a couple of minutes walking us through how much the foreign exchange changed your operating margin?

And how much of the $67 million charge that you are reporting or gain, I should say, that you are reporting, how much of that is really driven by one-time changes in a balance sheet translations versus how much of it is going to be perpetual assuming the dollar stays where it is?

Mike Zafirovski

I'll answer the first question, Chris. I'll have David to answer the second part. In terms of an operating margin, the impact is virtually zero. It's impacting $30 million, $40 million in revenues per quarter average. Most of it is offset with higher SG&A and R&D expenses. So at the operating marginal level, both current quarter and year-to-date, the operating margin impact is pretty close to zero, slight maybe $2 million, $3 million favorability, but very, very immaterial.. Dave?

David Drinkwater

Yeah, it's about 5% year-to-date Mike, on the operating margin impact. So we talk about the impact on the costs and the revenue down to the operating margin, which is relatively small.

In addition, we have this large, in the last two quarters, credit for foreign exchange principally the Canadian dollar. It was $67 million this quarter, $69 million the prior quarter and a portion of that we have moved off the P&L to the balance sheet.

So, if anything was the same, and who knows whether it will, but unlikely in Q4 as it was in Q3, in terms of movement of the dollar and the relative balances, and that number would be about half of the $67 million, Chris, going forward.

Now, we also looking at ways in which we can hedge even that amount, but we don't have all of that in place, as we speak. But I would expect the impact below operating margin to be about half assuming everything else is the same, and we're looking to try and minimize that impact.

Janet Craig

Thank you. Next caller, please.

Operator

Thank you. The next question comes from Mr. Mark Sue from RBC Capital Markets. Please go ahead.

Mark Sue - RBC Capital Markets

Thank you. Mike if we look at the environment, which has only gotten tougher, and some of the wireless areas don't grow next year. Is it possible that revenues can contract for Nortel in '08? And with that in mind, can you maneuver the R&D spend to stimulate the top line or will the impact not be felt until 2009?

Mike Zafirovski

I mean, Mark, we are in very close contact with our customers, and, obviously, the 2007 numbers do not have UMTS, so 2008 versus 2007 will be pure comparisons in that perspective. LG, I mean it's already a full year 2006 and 2007. So I think those analyses will be comparable.

But to answer your question, no, we do not see a scenario where our revenues will be down next year. You can argue, again, this is a budget discussion be most of the rest of this week, but the numbers in the mid-single digits in totality will be, I think, the minimum where we will be looking at our business.

But, under any circumstance, obviously it could be a recession. It's answer that's totally unexpected. But in any circumstance, we would not expect to be going backwards on operating margin, and we have plenty of flexibility in R&D and SG&A expenses to be able to drive that.

Again, from our perspective, where we are putting our investments in WiMAX, the investments, which we're seeing in 40-gig and starting to work on 100-gig, the transition to PBT and the carrier internet side, the continued progress in enterprise, and we've pretty good perspective what will happen in CDMA where we are not expecting growth per se. But I think in totality we are positioned well for modest growth in 2008.

Janet Craig

Thanks, Mike. Next caller, please?

Operator

Thank you. The next question comes from Mr. George Notter from Jefferies & Co. Please go ahead.

George Notter - Jefferies & Co.

Thanks very much, guys. I guess I just wanted to ask you a question about Q4, in terms of the revenue ramp from Q3 to Q4. I guess I'm wondering, where do you see the incremental business coming from? Can you talk a little bit about visibility that you have looking into Q4--maybe that's through the order book, maybe it's through pipeline analysis--but just walk us through where that visibility comes from, how you see it with two months left to go in the quarter? Thanks.

Mike Zafirovski

Thank you very much for that question. Part of this has been seasonal both in terms of a spend from our customers and also has been our traditional practices well as support of this and certainly is a seasonality, which has been there for the last number of years. We did say that CDMA, we do expect Q4 to be a significant, above a significant Q4, and this has been adjusted for announcements by Sprint that they will be reducing their numbers.

So as I said, CDMA is one significant area, where we had Q4 over Q3 growth last year as well. Also, we are seeing growth in services as well on a year-over-year basis. Sequentially, we did say that in our succession voice and with respect to IMS, we have been having a significant number of contracts signed over the last number of quarters, and progress is being achieved there, and I think those are the -- as I'm looking up and down this list.

David Drinkwater

If you look up and down the list, Mike, virtually every LC in every region is up in Q4 relative to Q3.

Mike Zafirovski

And we did say that the there was a deferred revenue of Q4 last year of $152 million, and we do expect timing of completing the contracts, which allow us to recognize revenues. We do expect that deferred revenue in Q4 to be higher than last year. We have been anticipating that increase in deferred revenues to happen before, but has not happened yet, but in our numbers we do expect higher deferred revenue release in Q4.

Janet Craig

Thanks. Next caller, please?

Operator

Thank you. The next question comes from Brant Thompson from Goldman Sachs. Please go ahead.

Brant Thompson - Goldman Sachs

Hi. I was wondering if you could give us a little color on the enterprise business with regards to the ramp that you are expecting into the fourth quarter seems quite significant and just talk a little bit about the visibility there or what are the factors going in that's really driving that? Thanks.

Mike Zafirovski

Brant, thank you very much for that question. We did say that the enterprise business will be up slightly over Q4 last year. So this be the first quarter where we would not have had a significant double-digit growth per se. But, that's a perceptive question, because there is a quite a bit of ramp from Q3 to Q4.

Things are progressing are well on, not to be like a broken record, but the R&D investments which were made in 2006 and 2007 are helping. Our go-to-market strategy which started in North America now is being driven in other parts of the world. The ICA alliance, we have put some of the highlights in terms of a customer wins, I mean significantly that's taking traction.

We kicked off our global accounts structural less than about a year ago or so, we have 52 accounts. Our story to them is very compelling, that we can deliver a global capability, which I think is as good as anybody and quite a few people are telling us are better than anybody today. As people understand that the voice is mission critical in our confidence of bringing carrier grade capability into the enterprise space. And with the visibility for me for Q4 is rather good.

As you know, that is a shorter cycle business, so it still can have some surprises up or down, but that's one area where we feel good. And also the services side as we're driving telepresence as we're driving multi-media applications, that's also increasing the relevance of the whole enterprise portfolio, not just in services, so that's also having an inherent benefit. Just to get off a little bit on a tangent, we had our first customer advisory meeting, we had 12 world class CIOs met at MIT just two or three weeks ago, which will be very appropriate place to have such a foundation for innovation and thinking outside of the box.

And so, I mean, we came with terrific level of a listing of what to do, how much more to do, but also truly big support for where our businesses have come in the last 18 months. But the short is that that we do have visibility and we do see a meaningful increase Q4 over Q3.

Janet Craig

Thank you. Next question, please?

Operator

Thank you. The next question comes from Mr. Ehud Gelblum from J.P. Morgan. Please go ahead.

Ehud Gelblum - J.P. Morgan

Hi, excuse me, frog in my throat. Thank you very much. If I could just a clarification and then a question on a broader question, Mike, on some of the things you mentioned earlier. The clarification, again, on the LG revenues, I wanted to poke a little bit deeper; I thought it was an excellent question earlier.

You mentioned that LG revenues were up $100 million year-over-year. Could you give us a similar concept on the quarter-over-quarter? And if the math on that works out, it looks as though the consolidated amounts of LG was roughly two times the $43 million you showed. So, consolidated in your operating margin was somewhere in the vicinity of a pre-tax version of whatever $86 million is. I'm not sure what that is. So, if you could, David or Mike give us a sense as to what LG revenues and LG operating margins did quarter-over-quarter, that would be very, very helpful.

And then Mike on the more broad question, you mentioned that the environment is obviously weaker and that you were walking away from certain deals and that was helping on the margin side. Can you give us a sense as to where is the environment weaker? Where are you seeing that? We obviously see that it in a number of companies, but it will be very curious to see where you are seeing that, is it in wireless, is it in enterprise, is it in the optical? And where are you walking away from deals? Who is being aggressive? Just give a sense as to what is weakening out there and where, will be helpful to see where the strong points are and the weak points are?

Janet Craig

Ehud, since we have a lot of people on the call, which question do you want to answer, the LG or the visibility question?

Ehud Gelblum - J.P. Morgan

Isn't at it clarification?

Janet Craig

Sorry.

Ehud Gelblum - J.P. Morgan

Boy…which do you think you can answer better?

Janet Craig

Which one do you want to answer, Mike?

Mike Zafirovski

I mean, I will see the second one. With LG we'll provide some additional color. But I can assure you the Q3 results of the impact on LG in totality were not a driving element.

Ehud Gelblum - J.P. Morgan

Well, that's good. That actually what we want to see. If we can quantify that then we could be very, very sure that and know that and see the business transformation really working. But I just want to help clarify that. But that's okay if you want to put it off until next week, that's fine.

Mike Zafirovski

By the way, I mean LG--this is an ownership, we are running LG with Six Sigma, with BT; I mean LG is simply the ownership element. We entered LG because we think it's a terrific acquisition. So from operational perspective, there are no differences running.

I mean, obviously there's a Board in terms of the influence of the majority owner supported that. We look forward to having additional inorganic activities like LG that not to be driving the business forward. But in respect to that, we are very hungry for business. I do not want to give you the wrong impression.

But any business that has a negative gross margin, which we had substantial ones in GSM and UMPTS Q3, Q4 last year Q1, Q1 this year, we walked away from a number of deals and obviously if you signed those deals they have a long tail. This is where we recognize those revenues.

We at least four or five, or quote unquote colleagues, CEOs that says Mike this is the price, you match it, and the deal is yours. We said look, we would move to, but if it gross margin volume alone it's not going to help, you need the gross margin. Lots of that was in Q3, Q4, Q1 of last year; Q1 of this year.

We are seeing some increased level of sensibilities in the marketplace across the board and obviously as a player, we hope that continues. We certainly are not leading with prices, but in terms of areas where the most significant, obviously carrier Voice-over-IP has a significant pressure, optical we're seeing significant pricing pressure, and in general GSM continues to see pressure, and that's where our productivity has been able to offset the price pressures.

Janet Craig

Great, thank you.

Mike Zafirovski

Thanks for that question.

Janet Craig

Next question?

Ehud Gelblum - J.P. Morgan

Thanks very much, Mike. That was great.

Operator

Thank you. The next question comes from Inder Singh from Lehman Brothers. Please go ahead.

Inder Singh - Lehman Brothers

Yes, hi, Mike. I just wanted to ask you a little bit about the other side of the opportunity here for you in terms of some of the technology bets that you have been placing. Obviously, the restructuring side here seems to be playing out. Can you tell us a little bit about the traction that you're seeing on some of the areas, for example PBT, we're hearing that carriers are increasingly starting to actually maybe require that in some of their future proposals or RFPs going forward, or 40-gig and the bet you're placing there, or in WiMAX. Can you give us an update on the technology bets you're putting and maybe just highlight perhaps the success in areas like PBT where maybe the momentum is starting to build?

Mike Zafirovski

Thank you very much for that question and, actually, I look forward to having more and more of those questions at the 15th at the Fireside Chat and in the future. But the bets, which we said we're going to make; one was enterprise, so I'm not be beating a dead horse here. But we are seeing a nice direction in enterprise and we expect that to continue.

WiMAX, we have 34 wins and trials in the current time, recourse to do many more of those. We think we are well positioned. Obviously time is going to tell over the next six to nine months. Some of the increased activity in that space, I mean, the thing is boding well what WiMAX can do for carriers, but also for companies like ours that can be able to deliver a end-to-end solution to carriers to be able to provide WiMAX-driven solutions for enterprises we think will be very significant.

So in terms of the biggest bet in terms of monetary amounts is WiMAX, that's big part of that repositioning, repositioning our R&D spend into. I think there are a number of comments in who is ahead, who is behind? And as more and more customers are looking for information, but we feel that WiMAX will be an explosive growth story for an industry in 2008 and we are fighting aggressively there.

PBT, you are right. Right now, we have 30 customers, and we expect some additional Q1 customers to actually be signing up for PBT. The revenues this year for us has been rather minimal, but that's the investments when you make into a long-term play, but we do expect for that to start exploding in 2008.

Optical is the next area. I mean this is 40-gig, I think, is going to become the table stakes very soon. Philippe Morin and the team had a number of customers in Ottawa just a couple of weeks ago, lots of interest across the board in the optical space including our ability to get to 100-gig.

And the last one although it's under the radar screen, we've put video as an incubator. The first incubator the Nortel has had in many years and its part of the George Riedel's responsibilities making great traction with Telus. We're testing it as we speak. And we believe that this will be nice opportunity for a number of other carriers. I mean I think we'll be approaching Tier 2 carriers. It's another area we're spending $25 million or so next year, but selective bets on being unique and different and that this will really encourage, I'm sure forgetting some things between John Roese, George and Lauren and the business presence, and then I'm sure provide even more color commentary next week.

And I just want to drive the point where people rate Nortel is only a legacy business and we take a pretty big exception to that. We are in the enterprise space. We are in the carrier space. We will sit at the table with lots of the decision makers and as people thought we had no chance at PBT, proved to be in correct. As people do not think, we can be running an enterprise. We proved that internally and with the IC alliance. And we look forward to keep changing the game and keep changing minds.

Janet Craig

Thank you. Next caller?

Operator

Thank you. Our next question comes from Gus Papageorgiou from Scotia Capital. Please go ahead.

Gus Papageorgiou - Scotia Capital

Thank you. Mike, just on update on the cost reduction program. I think you said that you were targeting about $750 million of cost reduction this year and that you had achieved about $270 million the first half. Are you on target to meet that $750 million, and can you kind of update us as where you stand at the end of Q3?

Mike Zafirovski

Gus, thank you for that question, and we have recalled the analyst reports mentioning your view of where we were and where we are going is probably closest to the marks, what anybody else says you are doing, congratulations. With respect to -- if you'll provide more details actually Dennis Carey but the numbers, we are in that vicinity. And also we are scrubbing the numbers for the 2008 budget. So we'll be able to provide more color commentary on both of those next week, including the areas where BT will be focusing on in 2008. But the overall answer is definitely moving in the right direction and we are aiming to be able to meet that very visible target.

Gus Papageorgiou - Scotia Capital

Do you think the $750 million in cost reductions for the year is achievable for this year?

Mike Zafirovski

I mean, first of all, it's not only just a clarification, it's not only cost reduction, it's a combination of pricing, it's a combination of charging services for revenues, but, yes, we do have a visibility to that and we'll give you some more specifics on it next week, Gus.

Gus Papageorgiou - Scotia Capital

Thank you.

Janet Craig

Thank you. Next caller?

Operator

Thank you. The next question comes from Phil Cusick from Bear Stearns. Please go ahead.

Phil Cusick - Bear Stearns

Hi, guys. Thanks for taking my question. Just a clarification. In the past you've talked about software sales being the driver for gross margin expansion and you made a comment that those probably don't stay or may not stay at the 43% where they are. And now talking about cost and labor improvements was there a big software sale component this quarter and how should we look at that going forward over the next few quarters? Thanks.

Mike Zafirovski

We feel there must be some kind of a misunderstanding. I mean 80% of our engineers are software engineers. We've made comments that as we drive services on its own, services may have a lower gross margin, because services has a lower R&D, not any reprieve on the targets for operating margin. But to be honest with you, I do not recognize the foundation of your question. Janet or David?

Phil Cusick - Bear Stearns

How about we just move to the gross margin side? You had made a comment about the sustainability and we don't know whether that stays at 43% or not. Is that something we should be thinking about over the next couple quarters?

Mike Zafirovski

The comments, not for the next -- Q1, we have not done Q1 revenues. Obviously, the level of revenues in the quarter has a pretty meaningful impact on leveraging some of the fixed costs within gross margin. I am sure if I have misspoken, we have to be on services because services, whether that's maintenance, whether that's systems monitoring, services in general have a lower gross margin because of lower R&D. And we do not expect services to be growing at a level or significantly greater than the rest of the portfolio to have an impact on the gross margin in the near term. Thank you.

David Drinkwater

Mike, we have said that for Q4, we anticipate improvement in our gross margin over the 43%.

Phil Cusick - Bear Stearns

Right.

Janet Craig

Next caller, please?

Operator

Thank you. The next question comes from Ken Muth from Robert Baird. Please go ahead.

Ken Muth - Robert Baird

Hi, good morning. On the Unified Communications alliance with Microsoft, when might we see the inflection point of that in kind of your revenue model?

Mike Zafirovski

I mean, there has been a big part of them. We understand an enterprise business is not where we want to have it in terms of revenues. However, a very big part of the revenue increase in enterprise has been the relationship with Microsoft.

So currently the comments, which I'll make there is that there has already been a big part of our growth in the enterprise business. Again, as the press release had indicated I believe 300 joint customers, now 100 licenses, and opening many doors for additional opportunities, regional as well as global customers.

So, in services we did say there's going to be longer-term play as we drive customers to go from IP to unified communications, but that process is only starting. So the services revenue pickup probably we're not going to see with respect to unified communications until the latter part of 2008. And again, Joel and Dietmar will provide more color on that next week.

Janet Craig

Okay. Thank you.

Ken Muth - Robert Baird

Okay. I thought there might be revenue deferred because of the new product rollout of the OCS and some of those revenues might be kind of hitting a little bit later. And that's what I was wondering about?

Mike Zafirovski

Obviously, no, the short answer there is no, that's not the case, Ken. I do want to point out the fact is that, and again, to have UMTS adjusted orders of 9% up in the quarter, 5% year-to-date, I mean, that's a pretty strong sign for a company without UMTS, and UMTS of course being the fastest-growing wireless activity this year. So, I do think that's probably the best way to be looking at our relevance in the marketplace.

Janet Craig

Great, thank you. And we have time for one last question.

Operator

Thank you. The last question comes from Mr. Paul Silverstein from Credit Suisse. Please go ahead. Thank you. Paul Silverstein, your line is open.

Janet Craig

Okay. We'll take one last caller. Paul is not available.

Operator

Okay. Thank you. The next question comes from Mr. Nikos Theodosopoulos from UBS. Please go ahead.

Nikos Theodosopoulos - UBS

Yes. I had a question on the deferred revenue. Can you actually break out the short-term and long-term deferred? And at the end of last quarter you mentioned that the mix of the deferred revenue going into the third quarter had higher gross margin than the corporate average at that time. Is that still the case right now with going into the fourth quarter? Thank you.

Mike Zafirovski

Nikos, thank you very much for that question. Just a little clarification, we did see that the gross margins of the deferred revenues were a slight improvement. I don't have it, I think it was about 43%, at that time we were 42%. So it's no longer, I would not believe it's materially any longer, but we will get back to you on that. But the higher gross margin was not significant at that point in time. And Dave?

David Drinkwater

It is tending down. So long-term has gone down in excess of $100 million this quarter. So we're continuing to push it from long term into short-term, which is helpful in terms of when it will come off the balance sheet. So that trend is continuing.

Nikos Theodosopoulos - UBS

You don't have the numbers? Do you have the actual short-term and long-term deferred? Or are you going to break that out in the Q?

David Drinkwater

It is in the Q.

Janet Craig

It's in the Q, it is being filed today.

Mike Zafirovski

Yeah. We just don't have it here in front of us, Nikos.

Nikos Theodosopoulos - UBS

Okay, thank you.

Operator

Thank you. And with that Mike did you want to close before I?

Mike Zafirovski

Yeah. We just took a little bit longer with the opening comments, but thank you for records crowd where I see listening this morning. So that's a good sign, I believe. But we liked the way the quarter finished with some of the adjustments by Sprint and AT&T.

We did take our internal volume targets from Q4, otherwise we would have remained on the initial guidance for the year, but we feel good about the momentum with customers, good momentum with the employees. The environment has not become easier. We know that and I think we'll see the management team act appropriately.

Few questions on LG. Let me just assure you LG is the critical and integral part of our company. LG is not the full story, but LG has been a good contributor, just the way enterprise has been and just the way some other pluses and that's what we're trying to do. We're trying to make investments and focus on areas where we can make a difference, and those will be the areas that will be driving the company forward. We look forward to seeing many of you next week in Toronto. And again, thank you for your interest and for many of your support for Nortel.

Janet Craig

Great, thanks, Mike. And thank you for attending today's conference call. Just to remind you the IR team is available throughout the day and over the next few days if you have any questions. And we look forward to that many of you are attending the Fireside Chat event next week. It is going to be of highly, it's going to be informal and very high-tech event with key executives at Nortel.

And as we move forward, we continue to want to improve our investor relations. So please, we look forward to any comments or feedback you have in terms of improving the program. Thanks for attending today's call.

Operator

Thank you. That concludes the conference call. Thank you for participating. You may now disconnect.

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