UPDATE 3-Tellabs beats forecasts as telco demand improves

* Q1 revenue $380 mln vs market view $362 mln

* Q1 EPS ex-items 10 cents vs market view 9 cents

* Q2 revenue view also beats estimates

* Gross margin rises to 50.7 pct from year-ago 44.2 pct

* Shares jump to highest level since Nov 2007 (Adds CEO and analyst’s comments, updates share move, byline)

By Ritsuko Ando

NEW YORK, April 27 (Reuters) - Tellabs Inc's TLAB.O results and sales outlook beat expectations as phone companies bought more network equipment to handle increasing wireless Internet traffic, sending the stock up more than 10 percent.

Chief Executive Rob Pullen said phone companies were spending more on their wireless networks, although they were keeping overall budgets for 2010 unchanged by cutting back on wireline upgrades. That reflects the popularity of smartphones and vindicates Tellabs’ focus on wireless networks, he said.

“Two years ago we focused on how we’re going to help the mobile backhaul, the mobile Internet. Our strategy is paying off,” he told Reuters in an interview.

Tellabs, a supplier to major U.S. carriers such as AT&T Inc T.N, Verizon Communications Inc VZ.N and Sprint Nextel Corp S.N, said on Tuesday its first-quarter revenue rose 5 percent to $380 million. That exceeded Wall Street's average forecast of around $371 million according to Thomson Reuters I/B/E/S.

Tellabs also forecast second-quarter revenue to rise 10 percent to 12 percent sequentially, which would be about $418 million to $426 million -- well above the average analyst forecast of $388 million.

The increase in mobile Internet use prompted networking equipment leader Cisco Systems Inc CSCO.O to buy Tellabs competitor Starent Networks for $2.9 billion late last year.

But in a sign that investors saw Tellabs as well positioned in the wireless networking market, shares of Cisco and other equipment makers like Juniper Networks Inc JNPR.N and Alcatel-Lucent ALUA.PA fell in early trade, while Tellabs soared as much as 11.4 percent to $9.16, their highest level on the Nasdaq since November 2007.

“We believe that Tellabs continues to benefit from ongoing carrier mobile backhaul investments,” J.P. Morgan analyst Rod Hall said in a note to clients.

Tellabs has also been cutting costs, helping its gross profit margin rise to 50.7 percent in the quarter from 44.2 percent a year earlier. For the full year, it expects gross margin to be in the high 40s.

The company reported first-quarter profit of $45.9 million, or 12 cents a share, up from $6.5 million or 2 cents a share a year earlier.

Excluding items such as acquisition and restructuring costs but including stock option charges, profit would have been 10 cents a share, a penny above the average market estimate, according to Thomson Reuters I/B/E/S. (Reporting by Ritsuko Ando; Editing by Derek Caney)