artnet Makes its Most Detailed Public Disclosure Ever, Has Sufficient Cash on Hand to Continue Experimenting with Online Auction Business
artnet recently published its 2009 annual report, and our first impression is that it looks very much like the reports Sotheby’s produces – lots of pictures, nearly 100 pages in length and very detailed financial disclosures. The numbers, however, are far less impressive than the presentation.
In November, we previewed artnet’s 2009 results in detail when the company released its nine months report. The big picture has changed very little in the time since:
- The firm’s revenues are down 5.6% compared to 2008 (in dollar terms) to approximately $17mln. To put matters in perspective, this figure is approximately three times the annual catalogue sales at Sotheby’s;
- artnet has lost money at a stable rate for two years now, with net losses approximately $0.7mln for the second year in a row. Its cash position fell from $4.1mln to $3.1mln in 2009, and the firm remained unleveraged;
- The company’s cash flow from operations went from a positive $0.66mln in 2008 to a negative $0.26mln in 2009;
- The firm’s capital expenditures fell to $0.65mln in 2009, about one third the level of 2008;
- The auction segment continued to weigh down on the company and was responsible for its losses. The auction segment losses widened from EUR1.3mln in 2008 to EUR1.8mln in 2009 and exceeded the roughly EUR1.3mln in profits made by the firm’s other business segments. The auction segment was solely responsible for artnet’s overall loss in 2009.
artnet remains undeterred, however. In his outlook for 2010, Mr. Hans Neuendorf, the firm’s founder and CEO, sets a target for artnet to double its online auction revenue in 2010 and expects the firm to return to profitability in 2011. As a side note, with this report artnet has become quite transparent about its directors’ compensation and stated that Mr. Neuendorf was given EUR528,000 in total compensation in 2009, which is roughly equivalent to firm’s net loss for the year.
artnet’s bet on online auctions is controversial. On the one hand, we admire the company’s strategic and long-term focus, conservative guidance, model transparency (its financial disclosures are now second to Sotheby’s among the listed art industry companies) and ability to grow auction volumes as projected – the size of its auction business more than tripled from EUR255,000 in 2008 to EUR815,000. If online auctions do indeed double in size in 2010 as artnet projects, then they could overtake advertising as the firm’s third most important business segment (after the gallery network and price database).
On the other hand, we remain very skeptical of this strategy choice. artnet has a natural advantage in the data and media segments and could easily have pushed for more sophisticated and value-adding products and services on the transaction-vetting side, for example. Instead, artnet allowed a significant decrease in the margins of its gallery network and advertising segment by concentrating its Capex, financial and management resources on the online auctions strategy. Online auctions represent a very competitive space occupied not only by numerous auction houses with their own online offerings, but also by a variety of high-growth firms like Art.com and Auction Holdings that are funded by private equity. Clearly, eBay is intent on remaining a player in the field for lower-end art pieces, a niche where artnet’s auction segment has thus far been constrained.
Moving into the field of art trading also turns artnet from a strategic partner of companies like Sotheby’s, Christie’s and multiple art fairs into their competitor. The firm should pay attention to the costly litigation that erupted earlier this year between Christie’s and its primary rival, Artprice. artnet should develop a contingency plan in the event that its online auctions suddenly begin to generate meaningful volumes and tempt the auction houses into considering some form of retaliation. The fact that artnet’s most profitable segment, its price database, is based on auction price data could offer the auction houses a nice weapon to deter artnet’s expansion into the higher-value trading segment. Of course, today artnet remains a distant and unlikely threat to the established auction trade. After two years of investment and operational losses, the firm’s annual gross revenues from its online auctions are less than what Sotheby’s and Christie’s generally collect on the sale of a single painting featured on the cover of a major spring or fall auction catalogue.
Investors seem to share Skate’s skeptical view of artnet’s online auction strategy; the firm’s share price has clearly decoupled from Skate’s Art Stock Index, which has surged since the clear return of excitement (and volumes) to the art market this past winter. Driven by Sotheby’s stellar share price performance, Skate’s Art Stock Index is up over 30% on year-to-date basis, while shares of artnet (and Artprice, which reported much worse 2009 financial results) remain in negative territory this year.
Skate’s believes that artnet’s share price will remain depressed at the $6-7 level unless the firm manages to produce a significant improvement in the profitability of its online auctions or becomes the subject of a hostile takeover play.
For the full story, including related data, please visit Skate’s Art Market Research
