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On February 7, high-performance semiconductor maker Semtech (SMTC) warned that it expects FY26 sales from its CopperEdge products to be lower than anticipated with no expected ramp-up during the year, sending shares spiraling lower by over 30%. Against this bearish backdrop, the company delivered upside Q4 results last night, but more importantly, its Q1 EPS and revenue guidance met analysts' estimates, signaling that the negative surprise from February has been baked in and that its business may be poised to rebound once this headwind passes.

• SMTC's CopperEdge products, which are used in active copper cables, are key components within AI data center infrastructure, facilitating high-speed, low-latency data transmission. NVIDIA (NVDA), a major customer of SMTC's in this business, informed SMTC that it was implementing rack architecture changes to address overheating issues in its new processing unit. These changes are significantly impacting sales of CopperEdge products, which SMTC said in February would dip below the $50 mln floor that it previously estimated.
• In Q4, the company achieved record data sales of $50 mln, equating to a yr/yr surge of 183%. The robust growth highlights SMTC's strong position and opportunities within the AI data center market. On that note, NVDA's upcoming launch of its next-gen AI GPU called Rubin -- now anticipated in 2H25 -- should provide a potent growth catalyst for SMTC later this year.
• Meanwhile, the company's IoT business is set to benefit from the Department of Defense's decision to place China-based Quectel on the restricted list of miliary suppliers. In particular, SMTC is seeing robust demand for its low-power wide-area networks (LPWAN) and long-range (LoRa) products, filling the void left by Quectel's absence in the market.
• Driven by a 30% jump in revenue and an 80 bps qtr/qtr expansion in gross margin to 53.2%, EPS improved dramatically to $0.40 compared to $(0.06) in the year-earlier period. By focusing on product optimization and debt reduction in FY26, SMTC expects to drive margins and cash flow higher this fiscal year. Building and maintaining a competitive edge in markets such as wireless connectivity and power management, while enhancing its manufacturing and packaging processes, should lead to stronger profits. Furthermore, after decreasing its net debt by 68% yr/yr in FY25, SMTC intends to pay down even more debt in FY26, lowering its cash interest payments.

While SMTC is currently facing disruptions with its CopperEdge products due to a configuration change at key customer NVDA, the company's in-line Q1 guidance eased concerns that this situation would cause another step-down in its FY26 outlook. Looking beyond the CopperEdge-related headwinds, SMTC's future looks bright, thanks to its growing presence in the AI data center infrastructure market.