artnet delayed publication of its 2012 financial results by over four weeks and finally released the results on Monday, April 29. Hardly a surprise, artnet’s annual report now evidences what Skate’s and other industry analysts suspected long ago—that artnet is heading toward a liquidity crunch and is hugely underperforming in its auction segment (proclaimed by artnet as its area of focus) when compared to its pure-play rivals like auctionata in Berlin, artspace, art.sy and paddle8 in New York and Saatchi Online in the UK.
All the artnet performance metrics in 2012 worsened on a y-t-y basis. Revenues are down by 6% in USD terms (flat in EUR terms due to the favorable USD/EUR exchange rate), and the firm went from an operating profit of EUR 0.9 million in 2011 to an operating loss of EUR 0.7 million in 2012. Furthermore, artnet’s operating cash flow went from positive to negative, its headcount increased and its cash position has been depleted to the level of 4-5 months at the burn rate artnet currently generates.
In Q3 2012, Hans Neuendorf successfully campaigned against Redline’s hostile takeover attempt when the Luxembourg regulated and based, Russian-funded investment manager offered EUR 6.4 per share of artnet stock (Skate’s advised on this transaction). The stock is currently trading at the EUR 2.8 per share level, living evidence of a bad decision made by Mr. Neuendorf and those shareholders that supported him last year.
artnet’s shareholders can find little comfort in the company’s 2012 disclosure – the auction segment that was supposed to drive the firm’s topline has stalled and produced just EUR 2.3 million in sales and EUR 0.18 million in gross profit for the year. This is less than 15% in revenue growth compared to 2011 and more than a 50% decline in gross profit compared to 2011.
This profitability decline is no wonder, as by now artnet has lost its first-mover advantage in the online art trading space completely. Much better capitalized, legacy and Neuendorf-leadership free, pure-play online art trading companies are grabbing market share and addressing the economics of the online art trade much faster. According to Skate’s estimates, the median growth of the six strong private peer group (Liveauctioneers, Saatchi Online, paddle8, artspace, auctionata and art.sy) was just below 40% in online art trading revenue for 2012, and these six companies raised over $50 million in fresh capital in the first four months of 2013. The online art trading market that artnet had for itself just three years ago is now an ultra-competitive space where artnet is no longer in the top three in terms of volume, has no capital with which to compete and possesses no remaining competitive advantages apart from its brand and price database. Those strengths are still important, but, based on the firm’s 2012 results, clearly not enough to ensure a viable business model under current artnet leadership.
Likely to avoid a going concern qualification, Mr. Neuendorf had to provide the auditors and shareholders with comfort that he would personally finance artnet through shareholder loans and deferrals of his compensation when the firm runs out of cash (and there is no if here – artnet will run out of cash this year).
In the global arms race for dominance in the online art trade, artnet has completely transformed itself from incumbent leader to an obvious victim. This only brings to mind a vivid image from a Jurassic Park movie: a white goat expecting T-Rex in the rain in the middle of a dinosaur theme park yet to be opened.
At below EUR 3 per share, and with no debt, no poison pills—thanks to the minority shareholders campaigning and litigation from last year—and some remaining prize assets, such as its price database and brand, artnet seems to be screaming for a new takeover suitor. Skate’s can bet we will hear about one shortly.