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Why Groupon Earnings Were a Big Disappointment

Groupon's fourth quarter earnings report so greatly disappointed Wall Street expectations that the stock tumbled nearly 30 percent after hours before pulling back slightly. Ahead of the earnings report the stock was down 72 percent over the past 12 months. So what sparked such a steep tumble?

(Click here for the latest after-hours quote.)

Revenue came in right in line with expectations, but the company reported a loss of one penny excluding various one-time items. That compares to estimates of a gain of three cents.

And looking to the first quarter, the outlook was far worse than expected for both revenue and an operating loss. The company says it expects between a $10 million loss and a $10 million gain, including $30 million in stock-based compensation.

(Read More: Groupon Outlook Disappoints; Shares Plunge)

On the earnings call, CEO Andrew Mason said that the results reflect the company's willingness to sacrifice short term operating profitability in order to drive growth over the long-term.

"Our vision to be the operating system for local commerce remains at our core," Mason said in his opening statements on the call.

(Read More: Groupon Features Help Merchants Measure Deal Success)

He also pointed to "continued volatility in the international business," saying "we have much work to do," to bring the company's overseas business to the same level of profitability as its U.S. business. Throughout the earnings call the company stressed that its international business will look more like its domestic business over time.

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In a phone call immediately after earnings were released, Groupon CFO Jason Child explained the company's lower margins. Why? The company has been "flexing" the fees it charges merchants—charging a small percent higher fees, but the majority lower fees, hence its profit drop.

Groupon's outlook for the first quarter is lower than expected in part because after its "goods" business benefited from the holiday season this past quarter, now it's expected to decline.

(Read More: One Franchisee's Cautionary Tale About Groupon's Pitfalls)

Child tried to stress the positive—a $300 million in gross billing between the third and fourth quarter. "That's the number that points to the long term health of the business and the long term health of the marketplace."

He also pointed to the growth of mobile: nearly 40 percent of total transactions are on mobile devices.

When asked about the swiftly plummeting stock Child said simply "it's a volatile stock."

—By CNBC's Julia Boorstin; Follow her on Twitter: @JBoorstin

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  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.