At the end of April, when Fool contributor Stephen Simpson checked in on Harmonic Lightwaves (NASDAQ:HLIT), the company had disappointed investors with low margins caused by selling a larger amount of third-party products and issued disappointing guidance for the second quarter. Though Stephen did report some good news in the interim, Harmonic recently dashed investors' hopes again. Management sharply lowered revenue and earnings estimates for the current (second) quarter. The company now forecasts total sales of $56 million to $60 million this quarter, which is much lower than the earlier estimate of $73 million to $77 million, and furthermore expects to post a net loss for the quarter.

So what happened?

Well, management claims that cable operators are delaying orders of Harmonic's digital head-end systems. Increasing competition was one of the culprits -- just as many of us will continue to drive the old jalopy for a little longer to give ourselves time to test-drive several new cars, cable companies like to evaluate products from multiple suppliers before committing to the deployment of any one company's equipment.

An indicator of just how poorly the company is doing this quarter can be found in management's trumpeting the lower sales of low-margin third-party equipment. This was mentioned in both the press release and on the conference call.

So let's see. Should we be pleasantly surprised that sales of third-party products fell when overall sales are coming in some 20% lower than predicted? In general, it is good to decrease sales of low-margin products, but only if the sales are shifted to higher-margin stuff. This quarter, it appears that the low-margin sales were shifted to . well, nothing.

It looks to me as if competition is the real risk here. Harmonic competes with both Motorola (NYSE:MOT) and Scientific-Atlanta (NYSE:SFA), which are much bigger and more capable of providing comprehensive product lines. Additionally, Harmonic noted in the previously mentioned conference call that it is seeing several new start-ups entering the fray. It seems likely that the competition is going to force Harmonic to further reduce prices, which will in turn pressure margins. What happens if business continues to be sluggish and Harmonic has to reduce prices?

At the end of the first quarter, this company had cash and short-term investments of about $104 million, with only $1.9 million in debt. The improving balance sheet bodes well for a small company in a growing industry.

Despite current off-key notes, the tune of a company like Harmonic can change very quickly. Investors have reason to hope that many of the unrecognized orders in the second quarter have just been delayed, rather than lost entirely. Furthermore, Harmonic has released new products that it expects will be very competitive in the market. The increasing demand for cable companies to upgrade their services may make Harmonic worth a closer look, but only for investors who aren't afraid of some off notes along the way.

To see what other Fools are saying about these matters, check out the Harmonic Lightwaves, Scientific-Atlanta, and Motorola discussion boards.

Fool contributor Dan Bloom has no financial interest in any company mentioned in this article.