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Sotheby’s earnings call and financial filings this morning offered their usual periodic window into the company’s inner workings, priorities, successes and weaknesses. The headline from the call which had an impact on Sotheby’s stock (BID) knocking 10% off the price as trading opened before recovering to around the $50-level for the rest of the day.

The stock was impacted by the news that although sales were up (22%) for the first half of 2018 over 2017’s total, income was down (26%.) More to the point, Sotheby’s commission margins, which had been improving steadily over the last three years, dropped from 16.7% last year to 15% this year. Sotheby’s was upfront that the fall in commissions could be attributed to two works sold in the first semester of 2018.

It didn’t take much to surmise that the two works mentioned were the Modigliani sold in New York and the Picasso Marie-Thérèse sold in London. On the call, CEO Tad Smith was quick to point out that one of the works made the company money even if it had an out-sized influence the commission margin while the other was simply mis-priced. (That’s a polite way of saying the company made a mistake.)

This is startling level of transparency from an auction house about their guarantee book. Those who pay attention to the auction houses might be asking themselves why. 

The answer, of course, is that Sotheby’s is trying to send a signal to Wall Street, even at the risk of embarrassing its own executives, that the decline in the auction commission margin is a temporary, one-time event. Sotheby’s CFO, Mike Goss, pointed out that the overall fall in auction commission margin, the source of the bulk of Sotheby’s revenues, was 170 basis points or from 16.7% down to 15%. The two paintings mentioned above were responsible for 110 basis points of that drop. The rest came from the competitive pressures surrounding a season when so many collector’s estates were on the market, Sotheby’s said.

The fact that the stock fell nearly 10% and recovered to a little more than a 5% drop is attributable to this messaging. Sotheby’s subtly but firmly made it clear that there is a difference between placing too big a bet and having it go wrong and a secular decline in margins.

The first is a mis-calculation or a necessary risk. Sotheby’s has been doing well in Contemporary art but struggling in the Impressionist and Modern category. Faced with the overwhelming volume of material at Christie’s in May, there were some very good business reasons to make sure the house had a dramatic work like the Modigliani to help defend its market position. That the work sold to the guarantor was surely not the hoped for outcome but selling still achieved the firm’s goals. The Marie-Thérèse might have sold better earlier in the Picasso market cycle surrounding these works but we all remember the heady atmosphere surrounding the Picasso market earlier in the year when the deal was likely made. Auction houses take calculated risks. Some of the risk was realized here. The firm also had some strong counter-balances in their earnings to offset some of the losses.

A secular decline in auction commission margins, the second option, would have far more consequential results for the company and its outlook. That may be part of the reason that Sotheby’s offered more than one explanation for the drop in commissions. One of the goals of Sotheby’s new management has been to shore up operating margins. That means making money where their business makes money.

The press covering Sotheby’s earnings is missing the bigger picture if it stops at the two paintings however. There’s a lot going on this quarterly report and we ought to take notice of much of it.

The very positive news is that private sales rose dramatically again this season. Christie’s reported strong private sales matching what Sotheby’s had done the year before. But David Schrader’s private selling operation was surging ahead at the same time. Christie’s sold $390m privately this year to Sotheby’s $542m. Sotheby’s own number was up 63% year over year. But Sotheby’s achieved 39% more than Christie’s on that score.

Earnings from private sales rose along with the overall volume. Last year, Sotheby’s booked $14.8m in commissions from private sales. This year it was $24m.

That money offset the drop in Sotheby’s loan book and earnings from art financing. Once considered a growth and profit driver, the loan book has been shrinking steadily for some time at Sotheby’s. A year ago, Sotheby’s Financial Services had $651m out against art worth far more than that. This year, the figure is down to $479m. That’s a 26% drop. It’s not clear whether this number reflects a fall in the market for loans or Sotheby’s making a conscious decision to lower its exposure. As a result, the firm booked $7m less in financing revenue.

Other parts of the company that were meant to add revenue and balance out the risks presented by the auction market remained flat this year over last year. Sotheby’s lucrative licensing deal with Realogy and its wine and income from its share in RM Sotheby’s held steady at nearly $4m for the first half of the year.

For the first time, Sotheby’s has broken out revenue and earnings from Art Agency, Partners, the much discussed advisory firm. We now know that AAP made a $1.156m in advisory fees in the second quarter this year. That’s down from the $1.43m they made in the second quarter of 2017. But there was another $624m in private sales and other fees to help cover the short fall.

That gives us a general bench mark on AAP’s expected revenues of around $5m. Since AAP has struggled to expand its business—especially the regular fees it was touted to drive as an offset to lumpier auction earnings—Sotheby’s breaking out these numbers may be a signal that the division should be prepared to receive more scrutiny in the industry.

Lastly, buried deep in the SEC filing is notice that Sotheby’s has guaranteed $194m worth of art for sale in the second half of the year or 2019. That total has been offset with $81.2m in third-party guarantees leaving $112.8m still on the books and at risk. Sotheby’s will surely work to obtain irrevocable bids for much of that exposure, especially with today’s impact on the stock price.

Remember, though, that today’s drop in Sotheby’s stock may be short-lived. During the analysts call, Tad Smith and Mike Goss made it clear that Sotheby’s is committed to spending the remaining $133m of its previously authorized $415m stock buy back. The filings also reveal the firm has another $300m or so in cash on hand. That raises the potential for another capital allocation to buybacks.

In the meantime, Smith pointed out to analysts the firm can start buying as early as Wednesday. Their previous trading seems to have been executed when the stock had fallen sharply at the beginning of April and the beginning of May. Both purchases drove the stock up sharply for a month after. There’s no reason to believe the same can’t happen again soon.