Groupon shares dive 24 percent on "underwhelming" forecast

SAN FRANCISCO (Reuters) - Groupon Inc lost almost a quarter of its market value on Wednesday after the company began to take a smaller cut of revenue on daily deals, sacrificing revenue and profits to attract and keep merchants.

People enter and leave Groupon Inc corporate office and headquarters in Chicago, Illinois, November 4, 2011. REUTERS/Frank Polich

“This raises questions about how these guys are going to be able to scale the business,” said Tom White, an analyst at Macquarie. “The forecast is underwhelming.”

Groupon shares fell 22 percent to $4.65 in after hours trading on Wednesday.

The Chicago-based company started sharing more money from its deals with merchants early in the fourth quarter to persuade them to run an offer for the first time or work on another offer.

That dented revenue and profit in the fourth quarter, Chief Financial Officer Jason Child said in an interview.

“We are focused on driving growth,” he said. “We will make the investments we feel we need to optimize for growth and merchant profitability.”

Fourth-quarter revenue rose to $638.3 million from $492.2 million in the year-ago period. The company also reported a net loss and an operating loss in the latest period.

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Groupon was expected to make 3 cents a share on revenue of $638 million, according to Thomson Reuters I/B/E/S.

The company forecast first-quarter revenue of $560 million to $610 million. This is sharply below the $650 million average estimate of analysts polled by Thomson Reuters I/B/E/S.

Groupon Goods, the company’s discounted product sales business, generated a lot of the fourth-quarter revenue growth. However, sales growth will slow in the first quarter, as is typical with other e-commerce businesses, Child said.

The Goods business also has lower margins than Groupon’s original daily deals business, he noted.

The cut in its so-called “take rate”, which many analysts had speculated was necessary to revive participation among merchants in its Internet offers, contributed to weak fourth-quarter results. That was also partly behind the disappointing first-quarter revenue forecast.

A larger-than-expected seasonal decline in the company’s Goods e-commerce business also drove the weaker first-quarter forecast.

Reporting by Alistair Barr; Editing by David Gregorio and Richard Chang