Audit Finds Homestore Overstated Revenue

Homestore.com Inc., which operates the Internet’s largest residential real estate site, said Wednesday that its revenue during the first three quarters of 2001 were overstated by as much as $95million, according to an audit of the company’s finances.

The preliminary results probably will require the once-highflying Westlake Village-based company to make “material restatements” to financial reports for 2001 and 2000, according to Homestore officials.

The company warned that “investors should not rely” on the financial reports and statements Homestore filed with government regulators during the first three quarters of last year.

For the nine months ended Sept. 30, the company initially reported revenue of $350.9 million and a net loss of $245.8 million.

Homestore management had long stressed that its advertising revenue was on a solid footing and derived mostly from large, mainstream companies.

“It gave us the impression that their advertising revenue ... would be less cyclical and would be at far less risk than your typical dot-com,” said Jay P. Leupp, an industry analyst at the investment firm Robertson Stephens.

Homestore is the latest former technology darling to confess that its revenue had been inflated. In doing so, it joins such companies as messaging infrastructure provider Critical Path Inc., video game publisher Take-Two Interactive Software Inc. and Internet media company StarMedia Network Inc.

As recently as this summer, the online provider of real estate information ranging from sales listings to interior decorator referrals appeared to be weathering the downturn that had knocked many of its Internet brethren to their knees.

But last month, in separate announcements, Homestore disclosed that its board of directors was investigating the company’s books and that Chief Financial Officer Joseph Shew had resigned because of personal reasons after less than a year in the position.

Trading in Homestore shares--which were priced above $80 two years ago--has been suspended for more than a week after a request from Nasdaq Stock Market officials for information from the company. Homestore stock last traded at $3.60 a share.

On Wednesday, the company said that the audit being conducted by its board and independent financial specialists had unearthed problems with the way the firm had accounted for online advertising deals.

The audit found that between $54 million and $95 million in online advertising transactions from the first three quarters of 2001 had been incorrectly reported as revenue. Instead, the transactions should have been accounted for as barter deals because they were related to purchases of goods and services from third parties.

The company said it expects to complete its audit by the end of the first quarter of 2002.

“We are committed to a thorough inquiry,” Homestore spokesman Gary Gerdemann told Reuters.

Gerdemann declined to give additional details about the audit and would not say whether any Homestore employees had been reprimanded as a result of it.

The company’s accounting practices and financial health came into question in November after Homestore said third-quarter advertising sales had plunged 44% from the previous quarter. Ad sales made up nearly one-fourth of the company’s revenue.

Homestore also said in November that it had lost three of its major advertisers and probably would be unable to replace that revenue.

Homestore now expects fiscal 2002 advertising revenue to be less than one-third of 2001 levels.

The disappointing results followed the company’s announcement that it would restructure by cutting up to 700 jobs--about 20% of its total work force at the time--and reorganizing into two operating units.

Despite the company’s mounting problems, the National Assn. of Realtors said Wednesday that Homestore will continue to operate the trade association’s popular Web site, Realtor.com.

The industry trade group, a major Homestore shareholder and business partner, said its Web site had not experienced any disruptions and it has no plans to switch to another company, spokesman Steve Cook told Bloomberg News.

The National Assn. of Realtors owns 3.8% of Homestore stock and its chief executive, Terrence McDermott, sits on the company’s board.