At first blush, some investors might be tempted to think that broadband-solutions provider HarmonicLightwaves (NASDAQ:HLIT) had a pretty good quarter.

After all, weren't sales up 32% to $73 million, and didn't net income of $1.7 million reverse a year-ago loss? Well, yes, but the trouble comes from those pesky Wall Street analysts. See, while the company posted income of $0.05 a share (before items), the analysts' average estimate for the quarter was $0.09.

That seven-cent miss, coupled with disappointing guidance for the next quarter, translated into a 30% decline in Harmonic's stock in trading on Friday.

The biggest problem in the first quarter was the nature of the orders that Harmonic received from its customers: The company saw an unprecedented increase in customer demand for third-party equipment.

These products carry much lower margins for Harmonic, and as a result, the company saw a gross margin decline on an annual and sequential basis. What's worse, Harmonic management sees those high levels of third-party orders continuing and pressuring margins into the next quarter.

For the quarter, Comcast (NASDAQ:CMCSA) and Charter Communications (NASDAQ:CHTR) remained major customers, and cable companies as a group made up 75% of sales. Satellite-TV providers accounted for 10% of the quarter's business, and the remainder came largely from telco providers.

Sure, it's tough to drum up excitement for a company that just posted a major disappointment that sent the stock down 30%. What's more, when you see other small cable-equipment providers like Terayon Communication Systems (NASDAQ:TERN) and C-COR (NASDAQ:CCBL) struggling, you're tempted to question the whole thesis that cable companies need to spend more to improve their services.

That said, I still like the business. Cable companies continue to roll out services like digital video, video on demand, high-definition television, and high-speed Internet and telephony services. And those services require equipment like Harmonic's headends. What's more, telco companies remain a wild card, with fiber-to-the-premises and video services both holding significant promise.

Of course, Harmonic isn't the only game in town. Rivals like Scientific-Atlanta (NYSE:SFA) and Motorola (NYSE:MOT) can offer turnkey solutions and end-to-end product suites that are certainly attractive to buyers wanting to deal with a sole supplier.

Still, the market should be big enough to allow small and specialized firms like Harmonic to both survive and thrive. Of course, for that to happen, Harmonic needs to keep investing in R&D to stay ahead of the competition, boost profitability, and sell more of its own gear. Although 2005 isn't off to a roaring start, the race isn't over just yet, and Harmonic could still produce sweet notes for investors down the line.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).