Is Milestone Actually Making Any Money?

Author: John Honovich, Published on Dec 10, 2011

In the past 18 months, Milestone Systems has redefined itself as the low cost VMS champion, slashing prices at a feverish rate and introducing the industry's most well known free VMS offering. However, these actions have raised many questions, none more basic than "Is Milestone Actually Making Any Money?" We first examined this in our August 2011 review of Milestone's Financials and Profitability. Now we dig further into their profits, contrasting them to leading video surveillance companies around the world.

Milestone's (Lack of) Profits

According to Milestone's income statements. in the past 5 years, their net profit margins never exceeded ~10% with them recording a net loss in 2008 and ~3% net profit margin in 2009. Founded in 1998, this covers the 9th to 13th years that Milestone has been in business. These profits are low for leading surveillance companies who typically have profits in the 10-20% range.

Moreover, relative to competitor's financials, Milestone's accounting method skews its profitability significantly. Milestone capitalizes large amounts of R&D costs relative to their profits.

If Milestone's R&D expenditures were expensed as is common with competitors, Milestone would have losses in 3 of the last 5 years and barely broke even in the other 2. For instance, in 2010, one of their best profit years, Milestone's net profits were ~21 Million DKK. However they capitalized somewhere between 12 and 17 Million DKK in R&D expenses. If Milestone expensed R&D, their net profits would be a mere fraction of the already modest level reported.

To be clear, we are not questioning the legitimacy or legality of Milestone's financial accounting. Generally Accepted Accounting Principles (GAAP) vary by country. Whereas capitalizing R&D is typically not allowed in the US, our understanding is that it is in Denmark, Milestone's home country. The question here is purely an issue of cost accounting and competitive comparison. Just like one needs to normalize parameters for a technology test, ones needs to normalize accounting methods for comparing company's financials.

Comparing to Other Surveillance Companies

Axis and Mobotix are two publicly traded companies that capitalize some R&D costs but proportionally quite small levels. While Axis capitalizes a small amount of developments costs, it is tiny compared to profits. Additionally, Axis expenses over $50M USD of R&D cost (see the Axis 2010 annual report). A similar pattern is found with Mobotix. In 2010, while they spent nearly 7 million Euros on development, only 1.25 million were capitalized compared to a profit of over 13 Million Euros (see Mobotix 2010 annual report). Unlike Milestone, even after expensing/factoring in all development costs, companies like Axis and Mobotix remain very profitable.

Why Is Profitability Important?

Over the long term growth without real profitability is unsustainable. Though Milestone is making accounting profits by capitalizing R&D expenses, it is still has a low to negative operating cash flow balance. Market leaders, whether Google, Axis or Milestone's role model, Microsoft, generate a ton of operating cash flow (i.e., they 'print' money).

Get Video Surveillance News In Your Inbox
Get Video Surveillance News In Your Inbox

Milestone has recently declared their intentions to take 80-90% of the VMS market but there's no shot of that without being robustly profitable. As the old saying goes, you cannot lose money on every sale and make it up on volume.

Objections to Profitability Criticism

We see two reasonable objections to our critique of Milestone's profitability:

  • VMS software have different economics than camera companies like Axis and Mobotix
  • Milestone's investments into R&D will deliver much stronger long term growth boosting profits in the long run

Our response: Leading software companies in any market are structurally well positioned financially. The nature of software sales and their inherent high gross margins makes it easy for winners to be very profitable. Moreover, and specifically to surveillance, VMS software have financial advantages competing against incumbent DVR providers who incur expensive hardware costs. While Milestone emphasized in our August 2011 note that they are focused on reinvesting in a growth market, so too are companies like Axis and Mobotix without having to sacrifice profits.

One element that makes comparison difficult is that none of the other pure play VMS software companies have publicly audited financial statements, making it difficult to compare against direct peers.

The other potential objection we see is that Milestone's investment in R&D will generate strong longer term growth and profits. The best part of Milestone's R&D efforts is the breadth of their development as they are packaging and rolling out features across every size segment. However, there is nothing in Milestone's product offering that is their unique Intellectual Property that would somehow drive customers to only choose them. As such, we find it hard to believe that their R&D expenses alone will drive disproportionate future growth and profits.

The Future

Milestone is aggressively sacrificing short term profits, more so even than their income statement indicates, to grow their business. The two most significant growth differentiators we see is Milestone (1) developing a global sales and marketing organization and (2) forcing a price war.

The best case scenario for Milestone looks to be:

  • Their global organization provides them the largest economies of scale of any VMS provider, allowing them to be much more profitable when the company's growth levels off.
  • Having so many free and low cost options decreases Milestone's long term marketing costs as users find out and try out Milestone online.
  • Their price war knocks out numerous competitors and allows them to increase prices in the future.

On the other hand, there are real risks, two of which are most worth noting:

  • Does building a global sales and marketing organization really increase economies of scale? It's very expensive, it's hard to do and it's being done in an era where large organizations are becoming less valuable due to the power of the web.
  • Can Milestone continue to operate on such low profits and low operating cash flow? At some point, if the business does not organically generate strong operating profits, they will need to raise more money, cut back on expenses and/or raise prices. If they do either of the latter two, it derails the current strategy.

Ultimately, we cannot guess how this will turn out. All that is clear is (1) Milestone is not making any real money today and (2) their market strategy is very risky. In the meantime, it will be very interesting to see how long Milestone can continue on this current path and how much damage they can do to their competitors.

Comments : PRO Members only. Login. or Join.

Related Reports

Dahua USA Sales Team Cuts - 'Strategic Right Sizing' on Dec 18, 2018
Dahua USA finishes a tumultuous year in which it acquired the Flir SMB business, was subject to the US government ban, terminated and restructured...
This Brooklyn Storefont Sells Millions In Uniview And Hikvision on Dec 18, 2018
Looking at their Brooklyn headquarters for this "CCTV Manufacturer", it is not much: Inside, it is not better: However, this company is one...
ACRE-Acquired Open Options Access Company Profile on Dec 17, 2018
Who is the company ACRE is acquiring? In this note, we examine Open Options line for best customer fit, key features, pricing, and main...
8MP / 4K Fixed Lens Camera Shootout - Dahua, Hikvision, TVT, Uniview on Dec 17, 2018
8MP / 4K fixed lens models are now common in lower cost lines, with nearly every Chinese brand and their OEMs now offering multiple options. To...
Imperial Capital Security Investor Conference 2018 Review - ADT, Resideo, Alarm.com, Arlo, Eagle Eye, ACRE, More on Dec 14, 2018
Imperial Capital Security Investor Conference is an event matching industry executives with financiers that frequently leads to future funding...
Foolish Strategy: OEMing Facial Recognition on Dec 13, 2018
Almost as 'hot' as face recognition marketing right now is OEMing facial recognition. Last year, they were a who's who of company's with...
FLIR Launches Body Cameras Unified With VMS (TruWitness) on Dec 11, 2018
While FLIR is best known for their thermal cameras, now they have expanded into body cameras, launching TruWITNESS, a public safety focused body...
The 2019 Video Surveillance Industry Guide on Dec 10, 2018
The 300 page, 2019 Video Surveillance Industry Guide, covers the key events and the future of the video surveillance market, is now available,...
AV Tech Company Profile on Dec 07, 2018
Taiwanese manufacturer AV Tech's revenue declined ~70% since 2012. Planning a comeback, AV Tech spoke to IPVM about their opportunities and...
Infinova's Xinjiang Business Examined on Dec 07, 2018
As pressure mounts for companies to stop doing business in China’s Xinjiang region amid a severe human rights crisis, IPVM has found Infinova sold...

Most Recent Industry Reports

ACRE-Acquired Open Options Access Company Profile on Dec 17, 2018
Who is the company ACRE is acquiring? In this note, we examine Open Options line for best customer fit, key features, pricing, and main...
Open Options Acquired By ACRE on Dec 17, 2018
ACRE is doing deals again. A year after they sold Mercury, they are buying another access control company - Open Options. In this note, we...
8MP / 4K Fixed Lens Camera Shootout - Dahua, Hikvision, TVT, Uniview on Dec 17, 2018
8MP / 4K fixed lens models are now common in lower cost lines, with nearly every Chinese brand and their OEMs now offering multiple options. To...
Network Cable Shootout - Belden, Commscope, Hikvision, Honeywell, NavePoint CCA, Windy City Wire on Dec 17, 2018
Every IP camera install needs UTP cabling. But how much of a difference is there between dirt cheap generic cables found online and the bigger,...
Hikvision Government Parent Holds Communist Party Congress on Dec 17, 2018
The Communist Party committee of Hikvision’s government parent, CETHIK, held a Party Congress earlier this month where senior executives, including...
Imperial Capital Security Investor Conference 2018 Review - ADT, Resideo, Alarm.com, Arlo, Eagle Eye, ACRE, More on Dec 14, 2018
Imperial Capital Security Investor Conference is an event matching industry executives with financiers that frequently leads to future funding...
Cisco Meraki New Cameras and AI Analytics on Dec 14, 2018
Meraki has released their second generation of video surveillance with 3 new cameras, AI-based video analytics, and 2 cloud-based storage...
Foolish Strategy: OEMing Facial Recognition on Dec 13, 2018
Almost as 'hot' as face recognition marketing right now is OEMing facial recognition. Last year, they were a who's who of company's with...
DVR Examiner - Video Recovery from Recorder Hard Drives on Dec 13, 2018
Bypassing passwords and long download times on-site, DVR Examiner collects and organizes video evidence directly from a hard drive extracted from...
2019 Access Control Book Released on Dec 12, 2018
This is the best, most comprehensive access control book in the world, based on our unprecedented research and testing has been significantly...

The world's leading video surveillance information source, IPVM provides the best reporting, testing and training for 10,000+ members globally. Dedicated to independent and objective information, we uniquely refuse any and all advertisements, sponsorship and consulting from manufacturers.

About | FAQ | Contact