Seagate Catches a Small Wave

Updated from 10:56 a.m. EDT

Buoyed by strong sales of its 2.5-inch and 3.5-inch products, hard drive manufacturer Seagate(STX Quote) is forecasting better-than-expected revenue and gross margin in its preliminary third-quarter results.

Seagate's results, which were released early Monday, offer some upside after a tough second quarter that was impacted by the tech spending slowdown.

The firm's preliminary results suggest an upswing, albeit a modest one, in the tech spending climate. The storage specialist will report third-quarter revenue of approximately $2.1 billion, just above the company's original outlook of $1.6 billion to $2 billion and well above analysts' estimate of $1.88 billion.

Demand for Seagate's 2.5-inch and 3.5-inch Advanced Technology Attachment (ATA) technology helped drive sales, and the company also shipped a higher mix of lower capacity desktop and notebook products than planned. As a result, Seagate's cash, cash equivalents and short-term investments grew by $200 million during the quarter to reach approximately $1.5 billion.

The Scotts Valley, Calif.-based firm also expects a better-than-expected gross margin between 7% and 7.5%, thanks to higher product volumes and tight spending controls.

Despite Seagate's upbeat message, the company's third-quarter margin is well below analysts' estimates, with Stifel & Nicolaus analyst Aaron Rakers predicting a 13.5% margin. After cutting its quarterly dividend earlier this year, Seagate also confirmed that it was halting dividend payouts in a statement released Monday.

"I'm encouraged by our progress during the quarter in identifying and addressing a number of key strategic issues that are critical to the success of our business model," said Seagate CEO Steve Luczo in a statement.

Seagate is nonetheless keen to restructure its finances. The company recently reworked its credit facility, something at least one analyst thinks is a step in the right direction.

"We are encouraged with Seagate's successful [credit] covenant renegotiation," wrote Jayson Noland, an analyst at Robert W.Baird, in a note released last week. "We continue to believe the company has substantially higher earnings power and the potential to fundamentally rebound in the near future."