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Sotheby’s released its third quarter earnings report yesterday. Spanning the slow Summer months of July, August and September, the quarter rarely provides much in the way of directional information about the tone of the art market or the evolution of Sotheby’s strategy. Paradoxically, the absence of data usually allows or, even, requires Sotheby’s management to use their earnings call as a bully pulpit on their business.

Before we survey the color commentary Sotheby’s provided, there were some numbers worth paying attention to. For the first nine months of 2018, sales are up a solid 20% to $4.04bn. Half of that rise came from a 49% updraft in private sales to $675.4m. That puts the division on track towards a nice round $1bn in private sales. That number surely reflects the new-ish private sales division hitting its stride but also a quietly increasing industry trend away from public auction to private transactions.

Nowhere is that better seen than in the Warhol market where industry players insist four massive private sales have taken place behind the scenes while the 20th Century’s giant has all but vanished from the auction block.

Digging deeper into Sotheby’s numbers, one can see that auction sales are up in 2018 without relying upon Sotheby’s to empty its storerooms as the firm did in 2017. That means Sotheby’s business improved markedly in 2018 without anyone really noticing. In the third quarter of 2018, Sotheby’s sold $6.5m of property that it already owned. These are works previously guaranteed that didn’t find buyers or inventory acquired in other ways. During the same period in 2017, that figure was more than 12 times that amount or $81m. For the nine months of 2018, inventory sales were $62.8m. The year before that figure was almost three times as high or $172m. Overall revenue was down but without an impact on the profit.

Just looking at the commissions that Sotheby’s earns on sales both public and private, Sotheby’s did much better in 2018 than 2017. For the third quarter, commissions rose 20% from $81m to $96m; for the nine months of 2018, the overall gain was slightly lower at 11% tracking the 2017 total of $494m which rose to 2018’s $553m.

This is good news for Sotheby’s core business: savvy specialists finding art that can sell and the buyers to bid on it. That core function can easily get obscured these days. Sotheby’s two main competitors, because they are privately owned, are free to focus solely on that core business. But because Sotheby’s was the subject of an activist investor campaign five years ago that resulted in the installation of CEO Tad Smith three and half years ago with a mandate to transform the company, Sotheby’s has to serve a different master.

These off-season earnings calls have become a place for Smith to showcase his strategy to transform the company. When you strip away the positioning, there’s a simple calculation at work here. Smith alluded to it in one of his answers to an analysts question. Smith has been tasked with “creating a way for the company not to be trapped by its historic valuation.”

What does that mean? When the activists started buying Sotheby’s stock, it was priced in the $30-range. During the battle for control, shares were bid up to the low $50 range. When Smith took over the stock was priced pretty much where it is now somewhat obscuring an three-year roller-coaster ride that saw the stock rise to nearly $60 on a combination of stock buybacks, strategic investors buying into the company and excitement about various previous takes on how the company might escape its “historic valuation.”

In plain English, not earnings call speak, Smith is saying his task is to figure out a way to break Sotheby’s stock (BID) out of its trading range over the last dozen years which—excepting some times of stress—has generally been between a $40 floor and a $60 ceiling.

A significant factor under Smith’s regime is the mandate for Sotheby’s to use its global profits to retire shares. Sotheby’s two largest shareholders both benefit from this strategy. The activist investor, Daniel Loeb is assured that his hedge fund’s 13% stake in the company stays marked to market at a small profit. Taikang Insurance, the strategic investor that owns part China Guardian auction house in Mainland China, also benefits from the buyback because its stake in Sotheby’s increases passively as shares are retired. That allows Taikang to see its original 13% stake swell to 15.5% without lifting a finger. When Chinese companies are hampered by capital controls, currency fluctuations and a volatile global trade war, having the option to passively gain a greater stake in a strategic asset is a boon.

Is this path likely to continue? With the stock trading at the bottom of the $40-60 channel, this would seem a historic opportunity for Sotheby’s to continue its slow march away from the public markets. CFO Mike Goss mentioned on the call that Sotheby’s was almost done with its most recent share buyback program. The company’s filings say they bought almost $200m in common stock at an average price of $47 in the first nine months of the year.

On the earnings call, Goss gave total number of shares repurchased as 3.8m of which 1.6m were bought this year or an additional 3% of the common stock disappearing from public markets. Goss signaled to the street that the board remains eager to do more buying. “Going forward, we continue to expect to return capital to shareholders through stock buybacks,” he said. “After we complete our recent $95 million Accelerated Stock Repurchase Plan, we may review with the Board an additional authorization, particularly given our assessment that we will still have approximately $250 million in excess capital that we mentioned on our last earnings call.”

At current prices, that would be another 5.6m shares or 10% more of the float. If that happens, Loeb and Taikang will together own almost a third of the company.

No matter how good Goss is at financial management, he cannot free up enough cash flow from Sotheby’s core operations to break the stock out of Smith’s “historic valuation.” If you listened closely to Smith’s responses to analysts questions, you could begin to hear the outlines of what might be a breakout strategy.

When asked about the implementation of Sotheby’s investment in technology, Smith off-handedly alluded to two options for growth. Although the conversation drifted away from a clear articulation of those two options, allow us the freedom to interpolate.

Sotheby’s, indeed, all art selling, is a high touch business. It takes a great deal of time invested by very knowledgeable and talented persons to convince someone to sell or buy a six, seven, eight or, especially, nine-figure work of art. The big numbers get the big press but they require a physical infrastructure—offices, sale rooms, travel budgets, exhibitions around the globe, art fair dinners, general white glove service to clients, not to mention providing guarantees and backing them up with irrevocable bids—that is costly, time consuming and forces the firm to move ever toward the higher end of the market. The only avenue left for expansion would be to leverage Sotheby’s brand as other luxury brands do. Smith waved at that in his comments but he doesn’t want to go there.

The high end of the market comes with high risks including guarantees that limit growth. Also, after a spectacular run at the highest end of the art market, Sotheby’s cannot seriously plan around continued significant growth. The art press leapt on Smith’s comments tamping down expectations for 2019 when he said he was braced for a more subdued market. When asked to expand on that view, Smith simply cited a self-evident litany of macro-economic factors that would cause any prudent executive to rein in expectations. But those concerns are for the core business.

What Smith wants to do is something harder. He wants to find a way to leverage Sotheby’s brand and global footprint to evolve into a low-touch business (or maybe just a lower-touch business) with greater reach is what’s behind many of Sotheby’s recent moves. The purchase of Viyet, now doing business as Sotheby’s Home, is the first step in figuring out what low-touch selling can be like in this space. Here’s what Smith said contrasting his vision against the high-touch model.

“We already sell things that are affordable to orders of magnitude of people who are not buying them. So why are they not buying them? We haven’t made it easy enough. What we’re trying to do with technology is make it so easy to transact with us that we will reach a bigger audience by two orders of magnitude.”

For those of you who didn’t go to business school, Smith is saying he wants to expand his customer base 100 times. A hundred times the customers won’t bring in 100 times the revenue but if Smith can find a way to harness low-touch buyers and sellers, he can significantly add to his business in ways that another $100m painting cannot.

How would they do it? That’s still remains to be seen. The hints here are that tools like Sotheby’s appraisal app that allows consignors to submit objects with greater ease and lower internal cost will allow Sotheby’s to vet the dross from the salable objects. Matching that to Sotheby’s faster information sharing among the high touch side of the business, what Smith calls the “paperless sale room” might begin to provide real direction for the company. Ultimately, Sotheby’s wants to be able to match more buyers and sellers with high quality heterodox material at a lower cost while still meeting a Sotheby’s standard of quality. That’s a big, hairy audacious goal.

Good businesses create flywheels, business practices that gain momentum and pull other better or best practices into the company by sheer, obvious necessity rather than speculative strategy. Flywheels are slow to build momentum. Once they do, inertia carries the company forward. The flywheel stabilizes against outward shocks and internal distractions.

Sotheby’s is probably still a ways away from a low-touch strategy it can impress Wall Street with. That’s what it needs to break out of the “historic valuation.” Unlike some of the media-based vaporware that previously emanated from the firm and disappointed the street, this strategy holds real promise if Sotheby’s can hammer out the kinks and prove their case.

In the meantime, as the filings show, the core business rules the roost. Sotheby’s revealed a guarantee book of $414.4m in these documents. All but $118m of those guarantees are covered by commitments. And some of that guarantee book is for property selling in 2019. Smith pointed out to one analyst that although the guarantee book remains big, the net exposure of the firm is getting smaller. In 2017, that $118m was more like $130m. Smith attributes that to a concerted effort to broaden the pool of irrevocable bidders which increases the firm’s throughput and reduces its exposure. That’s the kind of smart financial management that Sotheby’s seems to excel at but get little credit for.