Computer data storage systems maker Network Appliance Inc. (Nasdaq: NTAP) reported on Tuesday third-quarter profits down sharply from a year ago but above forecasts, as the company raised profit margins in the face of steady sales.

The chief executive of the company said he saw slight signs of improvement in the business climate and forecast sales would tick up and operating revenue would hold steady in the fourth quarter compared with the third. 

The Sunnyvale, California company posted a profit of $7 million, or 2 cents a share in the quarter ended Jan. 25, compared with $34.1 million, or 9 cents a share, in the year-ago period. 

On an operating basis, Network Appliance, which makes data storage systems that can be shared by a number of computers, reported pro forma profit fell to $15.5 million, or 4 cents a share from $38.9 million, or 11 cents a share in the year-ago quarter. 

Revenue dropped to $198.3 million from $288.4 million. 

Analysts polled by Thomson Financial/First Call had expected an operating profit of 1 to 3 cents a share, with a consensus forecast of a 2-cent per share profit on $198 million in revenue. The company had forecast 1 to 2 cents a share profit on sales of $195 million to $200 million. 

Shares rose in after-hours trade to $17.51 on Instinet from a close of $16.45 on the Nasdaq, before results were released. 

``I thought it was a solid quarter -- pretty much in line with consensus. The gross margin and operating expenses were positive surprises -- the company cut expenses better than expected,'' said Banc of America securities analyst Shaw Wu. 

Chief Executive Dan Warmenhoven said in a telephone interview that pricing was steady and looked to remain so. Competition had eased from a year ago, when business ``fell off the cliff'', he said. 

He forecast pro forma earnings per share would be steady on the previous quarter and that revenue would rise 2-5 percent. 

``We found the bottom and we feel like we understand the level of our business activity at this point, and we are actually seeing a slight trend up,'' he added. 

In the third quarter cheaper component prices and changes in general product configuration had helped improve the gross profit margin, the profit of sales minus cost of sales as a percentage of revenue, to 62.2 percent from 58.4 percent, he said. 

Shares of Network Appliance have substantially outperformed those of storage heavyweight EMC Corp. since the beginning of October, when many technology stocks hit recent lows. Since Oct 1 Network Appliance shares have risen about 165 percent while EMC has gained about 35 percent. 

Network appliance makes dedicated storage devices which hook into traditional computer networks, while EMC focuses on storage area networks, which are dedicated to storage but interact with traditional networks.