Nortel Networks reported solid revenue growth in the third quarter but vowed to work harder to tighten its cost structure. Though Nortel Chief Executive Officer Mike Zafirovski expressed pride and optimism throughout the call, he said, “I’m not satisfied with the pace of our progress.”

Zafirovski was particularly unsatisfied with the company’s gross margin, down almost one point from a year earlier to 38%. Nortel needs gross margins above 40%, he said. Nortel expects gross margins to be 38% to 39% in the fourth quarter, which Zafirovksi said was 100 to 150 basis points lower than originally anticipated. “We’re pretty confident we’ll be able to reverse that trend and start growing gross margins in the not-too-distant future,” Zafirovski said, citing the company’s new Mexico facilities and its LG joint venture as two factors that will drive down expenses.

A few things weighed on Nortel’s margins in the quarter: Nortel is also seeing pricing pressure in emerging markets, it said. The company also sold a greater proportion of lower-margin next-generation products in the quarter (EVDO Rev-A mobility equipment was one example). The speed at which the market is shifting to next-generation solutions is proving to be “more of a challenge to profitability than we previously expected,” said Peter Currie, Nortel’s chief financial officer.

Though the company’s sales, general and administrative expenses ($605 million, or 20% of revenue in the third quarter) were $38 million higher than they were a year earlier (due in part to Nortel’s joint venture with LG), they are 2 points lower as a percentage of the company’s revenue. Still, Nortel is not spending its money effectively on sales and marketing, Zafirovksi said, vowing to make improvements.

Currie promised to continue to “cull” some of Nortel’s low-growth ventures and “sharpen the focus” of its research and development efforts, with the goal of spending 15% of Nortel’s revenue on R&D by the middle of next year (it was slightly more than 16% in the third quarter).

Though the company improved its days sales outstanding in the quarter from 91 to 85 days, the number is still “far from great,” Currie said, vowing to work to lower it.

The company’s overall revenue was up 17% from a year earlier to $3 billion, and its $99-million net loss was $37 million narrower than a year earlier. Orders were flat in the quarter, as the company’s book-to-bill ratio dropped to 0.8 due to the timing of some CDMA orders and, to a much lesser extent, slower sales of UMTS gear.

Revenue from the company’s “mobility and converged core” division was up 23% to more than $1.5 billion in the quarter. CDMA revenue, the biggest contributor and fastest growing segment in that group, was up 37% from a year earlier to $704 million in the quarter, driven largely by sales in North America. GSM and UMTS revenue was up 8% from a year earlier to $563 million, as Nortel completed some contracts in Europe. Voice revenue, driven by North American sales of Nortel’s Succession softswitch platform in particular, was up 27% to $273 million.

Revenue from the company’s Metro Ethernet division was up 18% from a year earlier to $430 million in the quarter. Within that group, optical revenue was up 20% from a year earlier to $312 million. Revenue from Nortel’s enterprise division was up 14% from a year earlier to $609 million. Within that group, “circuit packet voice solutions” revenue was up 20% from a year earlier to $430 million. Services revenue was up 4% to $316 million in the quarter.

Nortel expects fourth-quarter and full-year revenue to show growth in the mid to high single digit percent range from a year earlier but would not voice expectations of next year’s revenue.

“We’re living up to the commitments I gave you almost a year ago when I came to this job,” Zafirovksi said. “These improvements will not happen overnight, but they’re starting to show.”