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September 23, 2008

Nortel Networks expects Q3 revenues of $2.3 billion

Canada-based Nortel Networks expects revenues of about $2.3 billion in the third quarter of 2008. Third quarter gross margin is currently expected to be approximately 39% of revenue primarily as a result of a product delivery delay into the fourth quarter and customer mix within the carrier business.

By CBR Staff Writer

The company has also revised its full year 2008 outlook and now currently expects revenue to decline between 2% and 4% compared to 2007, and gross margin of approximately 42% of revenue. Management operating margin as a percentage of revenue is expected to improve 125 to 175 basis points compared to 2007.

Third quarter operating expense is currently expected to be $60 million less than the second quarter 2008 level. With a sustained and expanding economic downturn, the company is experiencing pressure as carrier customers cut back their capital expenditures further than previously expected and certain enterprise and Metro Ethernet Networks (MEN) customers defer new IT and optical investments.

Since reporting second quarter 2008 results, the company said that it is seeing additional pressure on revenue due to foreign exchange impact and certain product delivery delays from the third quarter into the fourth quarter.

As previously reported, the full year outlook continues to include the expected completion of wireless contracts in the fourth quarter now representing about $320 million of previously deferred revenue.

The company said a comprehensive review of business is taking place to reshape the company. As part of the review, planning is underway for further restructuring and other cost reduction initiatives to reduce the company’s cost base to achieve a competitive business structure as well as to mitigate the risks associated with the company’s fourth generation carrier wireless investments.

In addition, Nortel also announced its intention to explore a divestiture of its MEN business, which includes optical and carrier ethernet portfolios. With a strong customer base, and technology breakthroughs such as 40G/100G optical networking, the MEN business is a premium asset with a highly differentiated offering, the company said.

Mike Zafirovski, president and CEO of Nortel, said: We are taking two years of consistent progress and leveraging it to make the necessary changes to preserve and strengthen our business. Great companies survive, and then thrive, based on their ability to adjust rapidly to changing market conditions, while delivering value to customers every single day.

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