Shares in group couponing site Groupon, one of the hottest IPOs of last year, took a nosedive in after-hours trading Friday after the company admitted in its annual report that it would need to revise its revenue and net income for the fourth quarter.
The company also disclosed that its auditing firm, Ernst & Young, identified a material weakness in internal control. The revisions resulted in a reduction to Groupon’s fourth quarter 2011 revenue of $14.3 million. The revisions also resulted in an increase to fourth quarter operating expenses that reduced the company’s operating income by $30.0 million, net income by $22.6 million, and earnings per share by $0.04. Financial results for prior periods, including as of and for the nine months ended Sept. 30, 2011, were not affected by the revisions, the company noted.
"We remain confident in the fundamentals of our business, as our performance continues to highlight the value that we provide to customers and merchants," said Groupon CFO Jason Child in a statement.
Groupon also affirmed its guidance contained in its Feb. 8, 2012 press release regarding expectations for first quarter 2012 revenue of $510 million to $550 million and income from operations of $15 million to $35 million. This guidance includes approximately $35 million for stock-based compensation and acquisition-related expense, and it assumes no material business acquisitions or investments and no further revisions to stock-based compensation estimates.
There is no change to Groupon's previously reported operating cash flow of $169.1 million for the fourth quarter 2011 and $290.5 million for the full year 2011. There is also no change to Groupon's previously reported free cash flow, which is a non-GAAP financial measure that reflects cash flow from operations less purchases of property and equipment, of $155.1 million for the fourth quarter 2011 and $246.6 million for the full year 2011.
The revisions are primarily related to an increase to Groupon’s refund reserve accrual to reflect a shift in the company's fourth quarter deal mix and higher price point offers, which have higher refund rates. The revisions have an impact on both revenue and cost of revenue.
In conjunction with the completion of the audit of Groupon's financial statements for the year ended Dec. 31, 2011 by Ernst & Young, Groupon included a statement of a material weakness in its internal controls over its financial statement close process in its annual report on Form 10-K for the year ended Dec. 31, 2011.
Groupon said it has been working for several months with another global accounting firm in preparation for reporting on the effectiveness of its internal controls by the end of 2012, as required following Groupon's initial public offering last year. Groupon said it 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.
The company ran into difficulty last year prior to its IPO for using non-standard accounting measures, such as “adjusted consolidated segment operating income," and later needed to revise its prospectus prior to going public (see SEC Raises Questions about Groupon’s Accounting and Groupon Adjusts Controversial Accounting Measures).
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