|
Revenue: |
| Top Line Up Strongly |
| We are pleased to present our
first half-yearly report as a public company. We have made significant progress in
each and every segment of our business, resulting in a 329% increase in year-over-year
topline performance to US$1.6 million. |
|
|
|
| Auctions Have Strong Start |
| Auction activity leads the way,
with US$498,000 in proceeds at June 30th, 1999 after commencing operations in March of
this year. By June 30th we sold 115 lots for an average sale of US$4,331 when many in the
art world said art auctions on the Internet could not be done. artnet’s
experience mirrors the conventional art auction business where roughly 80% of sales are
lots below US$5,000. Among our lots were several firsts, including Roy Lichtenstein’s
Nude with Blue Hair selling for US$18,620, the highest ever at auction, and Andy
Warhol’s $9 selling for US$11,025, highest price at auction in the past 10
years. The success of auction sales has drawn more consignments from a larger number of
dealers, providing a wider variety of offerings. It has also spurred higher sales in the
Gallery/Artist sector of our business. |
|
| Gallery/Artist Customers
Increase |
| Turning to galleries, sales in
the Advertising category, consisting primarily of Gallery/Artist web pages and hosting,
rose 259% to US$863,100 in the six months compared to the same period last year. While the
new auction services were part of the sales story, the real credit goes to a highly
focused sales effort building on the strong foundation laid in prior years. New clients
are being drawn by the expanding database of galleries, artists and works found online,
the increasing visibility of artnet, and the greater range of services on the site.
Renewal rates were in the 80% range in a period when the yield per customer increased,
demonstrating that we provide results for our Gallery/Artist clients. |
|
| Auction Database Enjoys
Brisk Sign-Up Rate |
| Subscriptions to our
unique, proprietary fine arts auction database rose 77% to US$215,300 demonstrating
continuing growth in this traditional backbone of our business. In February we instituted
a 50% price increase and changed our billing policy to a monthly subscription basis, and
we continue to enjoy a brisk sign-up rate. In addition to being a revenue source, the fine
arts auction database provides data for individual lots in the auction, assisting
customers in formulating their bids, which other auction houses can not provide. As well,
it is an effective cross-selling tool. |
|
| Bookstore Ramping Up |
| Other revenue totaled US$15,500,
up 75% from the same period a year ago. This is primarily due to our bookstore, which
commenced operation in February, and by June 30th had already produced revenue in its
short existence. It is currently reported in the "other revenue" category, which
totaled US$15,500, up 75% from the same period a year ago. By June 30th the bookstore
featured 12,500 titles, with cross-references to artists featured in the auctions, the
galleries database and the magazine. Today it has 14,000 titles as it continues to ramp up
operations. As an added service it has begun offering special orders for rare and
out-of-print books, to popular acclaim. In addition to being a new revenue source our
bookstore also provides cross-selling opportunities with each area of our site. |
|
| Artnet Magazine Key Asset |
| Our online magazine, offered
free, is edited by art world authority Walter Robinson. It is a key element of our
offering and an important feature for each segment of our customer base – gallery
clients, established collectors and art enthusiasts. The magazine is able to attract
celebrity contributors, including former Metropolitan Museum of Art Director Thomas
Hoving, Interior Design Editorial Director Stanley Abercrombie, and Sotheby’s
Senior Vice President of American Decorative Arts Wendell Garrett. Their features are in
turn used to attract sponsorship revenue. |
|
| Content, Commerce,
Community |
| In sum, our business is being
built on the three pillars of content, commerce and community. It starts with a very solid
foundation of content, unlike any other art-related e-commerce site on the web. Beginning
with our CEO, a prominent art world figure and successful gallerist, and continuing with
our many specialists drawn from prominent auction houses and art insititutions, we
understand the needs, interests and challenges facing our clientele. Our highly respected
magazine, the only daily of its kind, has become a must-read destination and a major
drawing card to our site. Our auction database is a valuable industry resource for
dealers, museums and collectors alike. Our knowledge of how the art business operates
gives us unmatched access to the gallery community. Our
content is followed by commerce developed in the true web style – approaching a
fragmented and inefficient industry in an entirely new way. While initial results are
predictably small, each success multiplies into bursts of new customers as doubtful
observers are converted to committed participants. This is true of our Gallery/Artist web
pages as well as the auction business as we continue to bring more and more of the art
world online. |
|
| IPO Proceeds Fund
Marketing |
| With the proceeds of our stock
offering we are now turning to the community element. We are negotiating with several
parties to market our site to a broader audience to expand our market and our economic
opportunities within it. Over the next few months you will be seeing a series of
initiatives designed to build exposure, audience and revenue based on development of a
larger community. Several initiatives are discussed below in Upcoming Business Development
Activities. |
|
|
|
|
Gross
Profit: |
| Gross Profit
Increases |
| Turning to the other elements of
our results, gross profit was negative at US$ (92,229), but a 36% improvement from
US$(144,517) in the year-ago period. While we instituted price increases for several of
our services this year, they will take time to show in the numbers until annual contracts
roll over. However, in this phase of strong customer growth particularly in the auction
business it will be important for us to maintain promotional pricing. Our focus needs to
be on development of the market more than exercise of pricing power. |
|
|
Expenses
and Net Loss: |
| Operating
Expenses Increase to Support Growth |
| Operating expenses were US$5.0
million, up from US$1.2 million in the year-ago period. Cash operating expenses, meaning
operating expenses less non-cash compensation, depreciation and amortization and bad debt
expense, were US$2.2 million, up from US$.9 million in the year-ago period reflecting
primarily the greater investment being made in sales, marketing and infrastructure to
develop and scale our business. As the year proceeds we expect this investment to
intensify as we add employees, enter new businesses and expend significant amounts in
print advertising, web advertising and promotional campaigns to build the artnet
brand. The increase in non-cash expenditure reflects
a charge to compensation arising from the initial public offering where under US GAAP rule
APB 25, "Accounting for Employee Stock Option Programs," the difference between
strike price and initial public offering price of employee stock options must be reflected
in the accounts over the five-year vesting period of the options. artnet, like other
Internet companies, regards the ability to issue employee stock options an important
recruiting tool in the highly competitive technology job market. Fortunately, future
option grants will not incur a charge to earnings under current accounting rules since
they will be issued at then-current market prices. The increase in depreciation and
amortization relates to the purchase of computer equipment and leasehold improvements
required to support the growth of our business, while the decrease in bad debt accruals
reflects an improvement in collections experience. |
|
| Net
Loss Widens |
| Interest income and expense and
other transactions were inconsequential, leaving a loss before minority interest at
US$(5.0) million compared to US$ (1.4) million in the year-ago period. After minority
interest, net loss was US$ (3.9) million for the six months ended June 30, 1999 compared
to a net loss of US$(1.4) million for the six months ended June 30, 1998. |
|
|
Liquidity
and Capital Resources: |
| Company Has
Significant Financial Resources |
| The Company finished the
six-month period with US$23.4 million in cash following its initial public offering on May
17, 1999. Since inception the Company has financed its operations primarily with equity
securities. Net cash used in operating activities
was US$2.0 million in the current period compared to US$1.4 million in the year-ago
period. Cash used resulted primarily from operating losses. Net cash used in investing
activities was US$1.4 million compared with zero in the year-ago period. As part of the
initial public offering transaction, cash was invested in the purchase of 79.6% of Artnet
Worldwide Corporation and in treasury stock. As well, cash was invested in fixed asset
purchases, primarily computer equipment. Net cash provided by financing activities was
US$25.6 million compared with US$1.5 million in the year-ago period. Proceeds from the
sale of common stock provided US$25.2 million in the first six months of 1999 compared to
US$1.5 million in the first six months of 1998. |
|
|
Upcoming Business Development Opportunities |
| Theme
Sales Drive Traffic and Revenue |
| We are going into
autumn with a very active marketing calendar. artnet ushers in the Fall with a monthly
calendar of company-wide theme sales. The first theme sale, Icons of the 20th
Century, launches on September 16th and highlights the entire site with important
artworks by 20th century masters in the auctions, a boutique in the bookstore,
a special exhibition of works from the galleries, and feature articles in the magazine. Icons
will be advertised in The New York Times, other important newspapers, the art
trade publications, and with our first online campaign on a major Internet portal. The Icons
event will be followed by Vintage Posters in October, comprising popular
French advertising posters from the late 19th and early 20th
centuries by well-known artists such as Mucha, Toulouse-Lautrec and Cassandre. The
November event Nudes in Art, will feature the human figure celebrated in
art. |
|
| Major
Advertising Campaign |
| Also this Fall,
artnet will launch a major brand-building advertising campaign. It has been designed
to differentiate artnet from our competitors and will be the primary focus of our
print advertising strategy. In addition, artnet will be the lead sponsor of the Com
und Artnet Neuer Markt Cup, a very popular Germany-based stock market game,
to reach the segment of the German market that has both a familiarity with Internet and an
interest in investment. |
|
| New
Auction Category |
| In the auctions we
launched a new category, 20th Century Decorative Arts, at the end of August.
The 20th century design market is the strongest ever with 20th
century furniture and decorative objects reaching record prices internationally. James
Zemaitis, who joined artnet after three years as a specialist at Christie’s, is
overseeing the launch. |
|
| artnet
At The Art Fairs |
| In the
gallery/artist business, the sales department is building on artnet’s success in
bringing in new advertisers at Art Basel in June by promoting artnet at the biggest
art fairs around the world, including the European Art Forum in Berlin in September, Art
San Francisco in October, and Art Cologne in November. |
|
| Attention-Getting
New York Events |
| In New York City we
will be sponsoring the Downtown Arts Festival from September 9-30, which kicks off the
Autumn art season with influential galleries participating in high-visibility events
including a gala opening and a series of popular art walks around the city. It draws large
crowds of international art professionals and art enthusiasts. artnet is a sponsor to
the event, and festival founder Simon Watson will contribute a number of columns to Artnet
Magazine. In November, artnet will be the
primary sponsor of ARTWALK NY, a day-long event and gala auction to benefit homeless New
Yorkers hosted by Peter Jennings and Madonna. For the first time ever, bidders in
cyberspace will compete with attendees on artnet to bid on a select number of works of
art from the silent auction while raising money for charity. ARTWALK NY is one of the most
popular charity events of the season among high-profile art collectors. |
|
|
Other
Business Developments: |
| Infrastructure
Build-Out |
| In the background a number of
critically important activities are underway to strengthen the company infrastructure and
support our rapid growth. A site rebuild and expansion is planned to accommodate growth in
auction categories and efficiencies across the site. Though the prior rebuild was only in
February, in an Internet environment it is imperative to regularly relaunch the site,
presenting a fresh look to our ‘retail store’. As well, customer service is
being upgraded with additional staff training and a 24x7 hotline. Vendor relationships are
being reviewed in keeping with our increasing size and purchasing power. Management
information systems are being instituted to measure and improve performance. In sum, the
Company is being scaled up to meet the challenges of rapid growth and leverage our
existing strengths. |
|
|
Employees
and Management: |
| Executive Ranks
Broadened |
| At June 1999, employees numbered
76 compared to 57 at December 1998 and 37 at June 1995. Included in the new hires is Chief
Operating Officer Barbara Krasne, with 9 years experience in CEO and General Manager
roles, most recently from Publicitas Advertising Services and USA Today International.
Barbara’s expertise in managing growth businesses in the US and Europe adds an
important strength as Artnet reaches an entirely new level. Barry Hintze joined as Vice
President Finance and Accounting, with 20 years’ experience in all aspects of
financial management and accounting. Barry was hired for his expertise with public company
responsibilities and abilities to institute controls and performance measurement systems.
Subsequent to June 30th, Grace Schalkwyk joined as Vice President Corporate
Development and Investor Relations from a 15-year career in investment banking and
corporate development. Grace’s abilities in strategy, transactions and investor
relations will help position the Company for further growth. |
|
|
Market
Context -- Growth of Internet and E-Commerce: |
| Compelling Case for
E-Commerce |
| Worldwide Internet adoption is
rising fast, from 28 million or 17% of PC users in 1996 to 157 million or 58% of PC users
in 2000, according to the Morgan Stanley Dean Witter Technology Team. In the US 63% of
adults use the web daily, and 79% of web users buy online. The 34 million European
Internet users will not be far behind. The OECD predicts worldwide e-commerce revenue will
reach US$300 billion by 2002, or 5% of OECD-7 retail sales. The OECD study notes enormous
efficiencies are gained in distribution from e-commerce – for example, airline
tickets cost 87% less to distribute, banking products 89%, life insurance 50%. Thus
consumers will demand e-commerce for the lower prices it brings, and businesses will use
it to lower costs. |
|
|
Market
Context -- The Art Market |
| Art Market Can Be
Made More Efficient |
| The conventional art market
remains highly inefficient, with high sales commissions, high dealer costs for
exhibitions, catalogues and transportation, high auction house costs, geographic
limitations to marketing art objects broadly, limited flow of pricing information, and
myriad other factors. The Internet is a good way for dealers to turn over their inventory,
and also acquire new inventory cost-effectively. The Internet is a good way for art
purchasers to view a wide selection from one location, and determine proper value. Forbes
Magazine estimates the art market today at US$15 billion, at least US$5 billion of which
is attributable to the conventional auction houses. This is a significant target market
for artnet to address with its more efficient approach to the purchase and sale of
art. |
|
| Opportunity for
Market Growth |
| Add to that a sizeable new
potential market of upper income, educated, Internet-friendly art enthusiasts in the key
18-49 age group and our market opportunity is tremendous. As one measure of the art
enthusiast population, 42.8 million people attended museums in 1997 in the US alone,
according to the American Association of Museum Directors. |
|
| A Dealer Says: |
| "We sold an important
Modern Master to an institutional collector. Thanks to artnet, the client found us,
was able to view our inventory online, and bought the piece. Based on this experience we
consider the Internet and artnet in particular as an important marketing tool to find
new clients." |
|
Hans Neuendorf remarks, "By bringing increased
transparency, access, liquidity and information, the Internet will completely transform
the art market, and artnet will be there to transform it." |
|