Shares of ScanSource (SCSC -18.31%), a small-cap distributor of barcode readers and point-of-sale scanners, checked out Wednesday morning — down 19.5% as of 10:40 a.m. ET today after the company missed on earnings in its 2022 fiscal fourth-quarter financial update last night.
Heading into the quarter, analysts had forecast ScanSource would earn $0.97 per share, pro forma, but last night the company announced its profits were only $0.91 per share (also pro forma). This was despite revenue coming in strong: up 12.9% year over year to $962.3 million.
The earnings miss notwithstanding, today’s sell-off is something of a surprise given that ScanSource ended fiscal 2022 on a high note. Sales growth for the full year was only 12%, so the jump to 12.9% in the fourth quarter was an acceleration for the business. Gross margins expanded by about 30 basis points to 11.5% (although this was worse than the full-year gross margin of 12.1%).
Net profits, on the other hand, did decline in the fourth quarter, falling about 2.5% as selling, general, and administrative expenses outran sales growth. But net profits for the year nearly doubled to $3.44 per share.
In short, the quarter wasn’t as strong as the year, but ScanSource still seemed to do pretty well in the period. So why is the stock selling off so hard? In a word: guidance. And in three words: free cash flow.
After posting decent double-digit growth in both the fourth quarter and 2022, ScanSource is taking a beat as its fiscal 2023 gets underway. Management forecast that sales growth will decelerate by more than half in the new fiscal year, slowing to just 5.5%. The profitability of those sales also looks likely to slacken, with management warning that adjusted earnings before interest, taxes, depreciation, and amortization will grow only about 4% to $174 million.
As if that weren’t bad enough, ScanSource saved the worst news for last. Way down at the bottom of its earnings report, management said that its free cash flow turned deeply negative in fiscal 2022: $131.2 million in cash burned, with $82.2 million of that in the fourth quarter alone.
These numbers worry me even more than the somewhat less-than-stellar guidance. While 2022 went pretty well for ScanSource, I don’t think I’d want to own this one heading into 2023.