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Groupon's 'Material Weakness,' Restated Revenue, Raise Questions About Both It and E&Y

o Roy Harris
10.04.2012 kl 21:42 | CFOworld (US)

In yet another financial reporting setback for online deal company Groupon Inc., the newly public company disclosed a "material weakness" in its financial controls, at the same time it reduced estimates of its fourth-quarter revenue.


In yet another financial reporting setback for online deal company Groupon Inc., the newly public company disclosed a "material weakness" in its financial controls, at the same time it reduced estimates of its fourth-quarter revenue.

For the revenue reduction - lowering the amount to $482.2 million from the previously reported $506.5 million -- the company, which went public in June, blamed higher levels of merchant refunds than it previously had predicted. CFO Jason Child, however, called the company "confident in the fundamentals of our business."

Discussing the material weakness statement, Groupon, whose independent auditor is Ernst & Young LLP, said it has been working in 2012 with "another global accounting firm," which it didn't identify. E&Y was involved with the completion of Groupon's audit at the end of the Dec. 31 year. A statement of material weakness in its internal controls was included in Groupon's 10-K.

'Expanding the Engagement Scope'

Groupon "continues to implement process improvement initiatives and augment its staffing, and is expanding the accounting firm's engagement scope to address the underlying causes of the material weakness," it said in its statement yesterday.

Charlie Perkins, a spokesman for New York-based Ernst & Young, declined to comment to Bloomberg on the earnings restatement.

But the auditors are at fault for not identifying problems with the financial controls earlier, Herman Leung, an analyst at Susquehanna Financial Group in San Francisco, told Bloomberg. Leung, who has a neutral rating on the shares, said: "This should have been highlighted by the auditors. The business is growing so fast that it sounds like they don't have the proper financial controls to deal with the growth."

Groupon's struggles with its financial reporting began almost immediately after its June initial public offering. After an SEC review, the company dropped a controversial accounting method just two months after its prospectus, and then restated its 2010 results in September, saying that it had counted the total amount of its daily-deal coupon sales as revenue, including fees paid to merchants.

'Feeds Negative Sentiment'

"This feeds some of the negative sentiment around their disclosure," Ken Sena, an analyst at New York-based Evercore Partners Inc., told Bloomberg News. Evercore has an equal-weight rating on Groupon shares.

The news service reported that Groupon shares fell 5.9%, to $17.29, in extended trading yesterday after its announcement. The stock had climbed 3.8% earlier in the day, although it is off 8.1% since November.

In another stumble, recorded in an interview with Bloomberg last year, before the IPO, Chairman Eric Lefkofsky had said the company was "going to be wildly profitable." But in July, when the company updated its IPO filing, it asked investors to disregard those comments because they didn't accurately or completely reflect his views.

The CFO Weighs In

Groupon reported that the latest revision is "primarily related to an increase to the company's refund reserve accrual," which creates the higher reimbursement rates.

"We remain confident in the fundamentals of our business, as our performance continues to highlight the value that we provide to customers and merchants," Groupon CFO Child said in the company's statement. It affirmed the guidance contained in its Feb. 8 press release, saying it expected first quarter 2012 revenue of $510 million to $550 million, and income from operations of $15 million to $35 million. This guidance includes about $35 million for stock-based compensation and acquisition-related expense. It also assumes no material business acquisitions or investments and no further revisions to stock-based compensation estimates.

It also said there hadn't been a change in its previously reported operating Q4 and fully year cash flows: $169.1 million and $290.5 million, respectively. And Groupon added that its non-GAAP, previously reported free cash flow, reflecting cash flow from operations less purchases of property and equipment, remained $155.1 million and $246.6 million, respectively.

Groupon pioneered the daily-deal market, where consumers buy discounts on restaurant meals and other services, and for which Groupon splits the revenue from the offers with merchants.

But the company said its financial-statement revision relates to the accounting for an increase in higher-priced deals -- those more likely to be refunded by customers. Last year, Bloomberg noted, the company began Groupon Reserve, a service for upscale deals such as a five-course meal at Santa Monica, Calif.-based restaurant Whist for $99.

The higher refunds widened Groupon's net loss by $22.6 million, or 4 cents a share.

Keywords: Business Issues  
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