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Groupon's 'material weakness,' restated revenue, raise questions about both it and E&Y

Roy Harris | April 11, 2012
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.

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.




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