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Ciena (CIEN) is trading pointedly higher after reporting strong Q2 (Apr) results and guided much higher for Q3 (Jul) revenue. Perhaps just as important, Ciena put to bed some concerns that were raised last quarter. This was Ciena's largest EPS beat in three quarter and the revenue upside was very impressive: $865 mln (+18.5% yr/yr) vs prior guidance of $800-830 mln. The Q3 (Jul) revenue guidance of $915-945 mln was well ahead of expectations.

The stock has been drifting lower in recent months. A key reason for that was commentary on the JanQ call that revenue growth with its webscale vertical would not be as robust as 2018. Ciena made it clear on the call today that webscale demand was still robust, just not as strong as the +140% growth seen in 2018. Management seemed surprised that its comments were taken as a negative on the last call.

Management pretty forcefully said today that it did not know where all the negativity was coming from. For example, during the Q&A session, CEO Gary Smith said "Just to be clear we never spoke of weakness with respect to webscale.... Remember we grew 140% or something in that vertical last year....all of the comments about weakness and our webscale business came from other places not from us." Bottom line, the company seems to have put this concern to bed.

A key theme on the call this morning is that customers are in the process of re-balancing their suppliers. Many customers have come to realize that their suppliers have been too China-focused. Also, there has been a shift to high quality suppliers outside of China and Ciena is clearly benefitting from this change.

Ciena also addressed US-China tensions. The company has not seen any substantive impact on its business to date and it reminded investors that is has almost no revenue exposure to China. This issue is getting a lot of press coverage now, but the movement away from Chinese suppliers has been going on for a couple of years.

Possible tariffs on Mexico are more of a concern as Ciena has manufacturing operations there. However, this is still a late-breaking development, still very fluid and it may not happen. Ciena is looking into mitigating strategies, Tariffs could impact Q3 gross margin by as much as 1%, however, that's still preliminary and that is a conservative estimate.

In sum, there is a lot to like in this report (also see our in-depth conference call coverage on InPlay at 9:30), it seems like demand is very robust and we are happy Ciena forcefully put the webscale concerns to bed. Looking ahead, these Mexico tariffs could be a problem if they eventually hit 25% by October. We are somewhat skeptical that will happen, but this issue will affect Ciena if tariffs go into effect. Overall, we are a bit surprised it has not participated in the strong move in tech stocks in 1H19. This report/guidance should get the name back on some radar screens.