Updated from 10:56 a.m. EDTBuoyed by strong sales of its 2.5-inch and 3.5-inch products, hard drive manufacturer Seagate ( STX) 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
Noland maintained his "outperform" rating and $9 price target for Seagate. Despite its healthier third-quarter sales, Seagate acknowledges the difficulty of predicting longer-term demand but expects fourth-quarter revenue between $1.9 billion and $2.2 billion, above analysts' estimate of $1.86 billion. Seagate, however, is still not out of the woods, according to consensus earnings estimates. During the second quarter, Seagate posted a loss of $1.02 a share, which included charges and costs or 79 cents a share. Analysts are predicting losses of 38 cents and 26 cents, respectively, for the third and fourth quarters. The last few months have certainly been busy for Seagate, which competes with Fujitsu and Western Digital ( WDC). The company introduced its "constellation" 2.5-inch and 3.5-inch enterprise hard drives earlier this year and is also targeting small- and medium-size businesses with the launch of its BlackArmor products, which it is aiming at businesses with little or no IT support. Both hardware and software makers have felt the ill effects of the economic downturn, although there have been some recent hints of a turnaround. Microsoft ( MSFT) and a slew of other software companies may be poised for a rebound, says Robert Breza, an analyst at RBC Capital Markets, as investors scan the horizon for signs of a healthy tech sector. Investors, however, were underwhelmed by Seagate's preliminary results. Shares were falling 3.5% to $6.42 in recent trading, while the Nasdaq was rising 0.09%. Seagate reports its full third-quarter results after the market close April 21.