Image of Sotheby's New York offices courtesy Wikimedia Commons.

Many businesses have seasonal ups and downs. For auction specialist Sotheby's (NYSE:BID), summer is a time that traditionally brings in less revenue, as auction activity gives way to more leisurely pursuits among the company's upper-crust clientele. Coming into Monday's third-quarter financial report, Sotheby's investors were ready for the typical seasonal decline but still hoped that the company would be able to do its best to produce some improvement in its results. Sotheby's delivered on that front, with narrower losses and higher sales than most had expected. Let's take a closer look at how Sotheby's did this quarter and what it means for the important months ahead.

Sotheby's gets rid of the summer blues
Sotheby's third-quarter results made the summer look a lot different from a typical slow season. Revenue soared 46% to $138 million, doing far better than the 18% growth rate that most investors were expecting to see. On the bottom line, Sotheby's lost $17.9 million after adjusting for extraordinary items, but that was down 13% from the year-ago loss, and the corresponding $0.26 loss per share was a penny better than the consensus forecast among investors.

Still, investors need to remember that some of the gains this quarter came at the expense of the previous quarter's results. Sotheby's pushed its evening sale of contemporary art in London into early July this year, but the 2014 event had occurred in late June, hitting the auction house's comparisons last quarter. Still, Sotheby's said that although net auction sales rose by $48 million because of the shift, third-quarter auction commission revenues actually fell, blaming weaker sales in high-margin categories like Asian Art, Old Master Paintings, and Jewelry.

Indeed, the biggest positive impact came from inventory sales, which soared more than eightfold to $53.2 million for the quarter. That easily offset the 9% drop in agency commissions and fees, and an increase of 45% in finance revenue also contributed to the solid quarterly results.

Sotheby's also did a good job of keeping costs in check. The company saved nearly $2 million on salaries and other labor costs compared to the year-ago quarter, and general overhead costs rose just 1%. Marketing efforts were slightly more costly but still represented a tiny part of Sotheby's overall budget.

CEO Tad Smith commented favorably on the results. "We are proud of our auction sale results in the categories of Impressionist, Modern, and Contemporary Art," Smith said, "which are on track to achieve record levels for the year." The CEO also noted that Sotheby's strategic objectives are progressing and appear poised to produce future growth.

What's next for Sotheby's?
Already, signs from the current quarter indicate reasons to be optimistic about Sotheby's going forward. Smith said that its auctions added up to $780 million in gross sales proceeds in just three days in early November. Included in those sales were two pieces from the collection of former Sotheby's board chairman Alfred Taubman, and further sales from the collection will bolster future results for the auction house as well.

Also during the quarter, Sotheby's moved forward with a stock buyback program. In August, Sotheby's said it would spend $125 million on an accelerated share repurchase program, initially committing to about 2.67 million shares but with the actual amount to be determined based on actual share prices during the period of the program.

Yet some remain concerned about Sotheby's. In September, one bond-rating agency warned about the expansion in the auction house's line of credit, which it extends to help clients get loans to purchase art. Although the boost in finance-related revenue helps in good times, it could lead to a debt downgrade in a future recession.

More generally, the big question for Sotheby's is whether it can keep bringing in strong bids. The company's partnership with eBay (NASDAQ:EBAY) has done a good job of raising awareness of Sotheby's auctions, with eBay streaming auctions live. Yet even though eBay offers another way for potential bidders to participate in Sotheby's auctions, the fact that Sotheby's needed to turn to eBay in order to boost its visibility is in itself a sign of how the industry has changed.

Sotheby's stock fell more than 5% following the announcement, reflecting some of the longer-term economic concerns that market participants have right now. To stay on track, Sotheby's will have to keep producing good results at its auctions throughout the key fall season, and any shortfall could continue to leave the auction house struggling to find faster growth.