Milestone Financials and Profitability Examined

In this note, we examine the financials and profitability of VMS developer Milestone Systems. As one of the largest pure-play software only VMS providers, Milestone's progress is often looked as a benchmark for the overall market segment.

Fortunately, Danish companies are required to regularly disclose financial information to the Central Business Register (CVR). Milestone Systems has a CVR page [link no longer available] summarizing their disclosures.

From the 2010 Milestone financial report, here are key notable financial points:

• 2010 revenue is approximately ~$42 Million USD
• For the 3 year period from 2007 - 2010, CAGR was ~35%. 
• Milestone has grown 374% from 2006 to 2010
• The best growth year was last year (2010) when growth was ~55%
• The worst growth year was 2009 (during the recession) when growth was ~11%
• Maximum net profit margin in the past 5 years was ~10%
• Milestone had a net loss in 2008 and a net profit margin of 3% in 2009
• Gross profit margins have consistently been between 75% and 79%
• Milestone is cash flow positive and has ~36 million DKK (or ~$7 million USD) cash on hand

For specific numbers per year, take a look at the copied table (with translated headers) below:

Revenue Compared to other VMS Vendors

While Milestone discloses their annual revenue, comparing revenue fairly is challenging because:

• The mix of products different vendors sell (e.g., Milestone historically has only sold software, not hardware, while most competitors sell both; note: in 2011, Milestone entered the hardware business)
• Fluctuations of exchange rates over the last few years. Over the past 3 years, DKK / USD exchange rates have fluctuated more than 30%.

That noted, using 8/31/11 exchange rates, Milestone's 2010 revenue of 217 million DKK is equal to ~$42 Million. That is roughly similar to Genetec's and twice as much as Exacq and Axxonsoft (though note all other manufacturers include hardware / non VMS software revenue). Additionally, not disclosed, but important to understanding Milestone's revenue is how much they generate from their 'ingredient OEM' [link no longer available] deal with OnSSI.

Profitability Comparison

Reviewing Milestone's financial report, the company's relatively modest profitability stands out. While there are no publicly audited financial documents for any other pure-play VMS software providers, a number of IP camera manufacturers do disclose. Companies like Axis and Mobotix generally have net profit margins over 15%, notably higher than Milestone's. We asked Milestone about this. Here is their response:

"Milestone has not historically planned for high profits. As we are still a privately held entity, we have the 'luxury' of long-term planning over short- term share price optimization, which very often has to be the case for publicly traded companies. In a growth market such as ours for global VMS, it has been much more relevant for Milestone to reinvest as much as possible to further build our company (geographical presence, products and branding). Please be aware that if you want to compare apples to apples, you are likely to use “EBITDA” as the guidance for profits. Our longer term planning is a 35-40% EBITDA margin, based on IFRS accounting principles. When we reach this level of longer term profits, and given that the surrounding markets are ready, Milestone is likely to go public."

It is difficult for us to assess the strategy though certainly one could argue that companies like Axis and Mobotix have achieved similar growth rates as Milestone and higher margins at the same time. Ultimately, future growth rates will have a major impact in determining which strategy is the best. This is more a matter for investors than integrators and end users.

Note: The full 23 page 2010 Milestone financial report can be purchased from this section of the CVR [link no longer available]. By CVR rules, we are not allowed to redistribute/share the financial report copy we purchased.