On February 7, Semtech (SMTC, Financial), a high-performance semiconductor maker, announced that FY26 sales from its CopperEdge products are expected to be lower than anticipated, with no ramp-up in sight for the year. This news caused shares to plummet by over 30%. Despite this, the company reported strong Q4 results and its Q1 EPS and revenue guidance met analysts' expectations, suggesting the negative surprise has been absorbed and a rebound may be on the horizon.

SMTC's CopperEdge products are crucial for AI data center infrastructure, enabling high-speed, low-latency data transmission. A significant customer, NVIDIA (NVDA, Financial), informed SMTC of rack architecture changes to tackle overheating issues in its new processing unit. These changes are impacting CopperEdge sales, which SMTC now expects to fall below the previously estimated $50 million threshold.

In Q4, SMTC achieved record data sales of $50 million, marking a 183% year-over-year increase. This growth underscores SMTC's strong position in the AI data center market. NVDA's upcoming launch of its next-gen AI GPU, Rubin, anticipated in the second half of 2025, could serve as a growth catalyst for SMTC later this year.

Additionally, SMTC's IoT business is poised to benefit from the Department of Defense's decision to restrict China-based Quectel as a military supplier. SMTC is experiencing strong demand for its low-power wide-area networks (LPWAN) and long-range (LoRa) products, filling the gap left by Quectel.

Driven by a 30% revenue increase and an 80 basis point quarter-over-quarter expansion in gross margin to 53.2%, EPS improved significantly to $0.40 from $(0.06) in the prior year. SMTC plans to enhance margins and cash flow in FY26 by focusing on product optimization and debt reduction. By strengthening its position in wireless connectivity and power management, and improving manufacturing and packaging processes, SMTC aims for stronger profits. After reducing net debt by 68% year-over-year in FY25, SMTC plans further debt reduction in FY26 to lower cash interest payments.

While SMTC faces disruptions with its CopperEdge products due to changes at NVDA, the company's in-line Q1 guidance alleviates concerns of further downward revisions in its FY26 outlook. Beyond these headwinds, SMTC's future appears promising, bolstered by its growing role in the AI data center infrastructure market.