Updated from Jan. 27

Avaya

(AV)

surged 9% in early trading Wednesday as investors eagerly noted the telecom gear company's expanding profit margins.

The Basking Ridge, N.J., maker of office switchboards posted a first-quarter continuing-operations profit of $30 million, or 7 cents a share, on sales of $971 million. That compares to a year-ago loss of 34 cents a share on sales of $946 million.

Analysts were looking for a 4-cent profit on sales of $964 million for the quarter ended Dec. 31, according to a Reuters Research tally. Including the portions of its connectivity and Expanets businesses that it disposed of, Avaya earned $10 million, or 2 cents a share, in the latest quarter.

Gross margins were impressive. By purchasing its reseller Expanets, Ayava was able to cut out the middleman and subsequently widen gross margins to 46% from 42% a year ago. JP Morgan analyst Ehud Gelblum says the company's prediction for improved margins this year suggests Avaya could continue to acquire its so-called channel partners.

For the fiscal second quarter ending March 30, Avaya says its profits will match first-quarter levels. That's slightly better than Wall Street's 6-cent analyst consensus.

Gelblum, who rates Avaya a buy, also highlights in his research that the company said it was not seeing big pricing pressure. Gelblum raised his 2004 earnings estimates for Avaya to 41 cents a share from 33 cents, on the strength of the company's margin and pricing strength.

On Wednesday morning, the stock jumped $1.34 to $16.75.

Avaya shares have risen more than 400% in the past year as investors warmed to voice-over-Internet-protocol equipment suppliers. The company, formerly

Lucent's

(LU)

office phone networking arm, has had success selling business users so-called hybrid switchboards that combine the features of conventional desk phones with the some of the data features available through Internet technology. Avaya competes against

Nortel

(NT)

and

Cisco

(CSCO) - Get Report

in sales of what's called converged voice and data office systems.

"The increase in revenues we saw this quarter compared to last year reflects what we believe is the beginning of a rebound in capital spending," CEO Don Peterson said in the company's earnings release.