Canalys's Jay McBain noted on LinkedIn that while it's been a disappointing, roller-coaster of a week in the U.S. economy -- he specifically cited the stock market plunge, disappointing U.S. unemployment numbers and underwhelming tech earnings and massive layoffs from the likes of Intel and Dell -- there's still reason for optimism in the channel.
"Tech spending has actually been solid given these challenges, and looks to be for (at least) the next two quarters. There was a lot to like in the past quarter: 15 out of 18 companies in the Canalys Tech Titans grew in Q2 (including all of the five largest companies, a first since 2022). The group outpaced the 14-year growth average (even when excluding NVIDIA's contribution). [And] income growth continued to outpace revenue growth, showing continued fiscal conservatism," McBain noted in his post.
The market is not without its challenges and concerns, but overall, there are still plenty of signs of healthy spending. The channel agrees.
What we're seeing at ChannelE2E and MSSP Alert backs that up. Anecdotally, there are lots of new (and/or improved, expanded, reinvigorated) channel partner programs popping up from NinjaOne, Next DLP, Safe Security, Darktrace and others turning to the channel to advance their go-to-market strategy. There are also a slew of new executives heading up these programs from the C-suite, which speaks to enterprises' commitment to their new or existing channel programs -- Scott Goree at Optiv, Eric Cheng at Console Connect, Michael Nagao at Safe Security, Denise Walter and Dan Monahan at Darktrace, just to name a few. Everywhere we look there are channel programs, dedicated executives and recognition that the channel is driving growth, profitability and success. Futurum Group announced this week it hired Tiffani Bova, former Gartner channel luminary, to create a new dedicated channel intelligence and research arm.
The Channel is the Place to Be
Recent ConnectWise Service Leadership research showed that while managed service revenue growth has slowed down to pre-COVID-19 levels, MSP profitability has remained at historic highs.
According to the report, managed service revenue growth did experience a slowdown worldwide. The decline was first observed in North America, with the peak occurring in Q3 2022. In Europe, the peak was later, in Q2 2023, and has declined for four consecutive quarters. Australia/New Zealand witnessed its peak in Q1 2024 and is expected to follow the same pattern.
That might sound like the opposite of optimistic, but Peter Kujawa, vice president and general manager of Service Leadership, a ConnectWise solution, told ChannelE2E, it's just a reset to 'normal' after the bubble created by the first few years of the pandemic.
Despite the deceleration in revenue growth, MSP profitability has shown resilience. The average adjusted EBITDA for MSPs worldwide increased to 14.1%, the highest in eight quarters, according to the research. MSPs have been enhancing their profitability by improving gross margins on services and products. The average product gross margin reached 26.3%, the highest in eight quarters. Additionally, the average managed service gross margin rose to 46.2%, the highest in over a year. However, project/professional services gross margin experienced a decline, dropping to 19.4% from 24.6% in Q1, likely due to lower growth in project/professional services revenue during Q2.
"If we look at profit, well, first, we see revenue flattening out. But the gross margins are doing really well," Kujawa said. "MSPs total gross margin was up last quarter from 38.8 to 39.2; that combines product and service gross margin. Infrastructure service, which is for most of the MSPs their main focus, went up from 45.3 to 45.8. Product went up from 25.9 to 26.3. If we look at service gross margin, and specifically managed service gross margin, it was one of our best quarters in the last eight. It went from 45.4 up to 46.2," he explained. This is proof positive that MSPs are focusing on running their businesses efficiently, continuing to make solid decisions that are improving their margins and delivering value for their customers.
Private equity (PE)-backed MSPs also achieved their highest level in eight quarters, with an impressive 18.7% adjusted EBITDA, the Service Leadership research showed. Notably, PE-backed MSPs demonstrated faster revenue growth, primarily driven by strategic acquisitions. In Q2, these MSPs grew total revenue approximately four times faster than their non-private equity-backed counterparts.
McBain said Canalys data showed 72% of partners now expect their revenue to grow in 2024, with 37% predicting it to increase by more than 10%. This is a rise from the 64% who anticipated growth back in December. Despite Q1’s subdued enterprise spending and a strong U.S. dollar, APAC and LATAM partners had the biggest rise in 2024 growth expectations, Canalys data showed.
Three Cheers for the Channel
The tech industry was largely responsible for the United States economic "soft landing" and partners were the tip of the spear in optimism from the onset of the COVID-19 pandemic. Similar dynamics happened in 2001 and 2008 when the tech industry pulled the world out of recession - and it is clearly happening again, McBain said. The managed services community has proven its worth to businesses, and there's no going back, Kujawa added.
"The last few years proved the importance of managed services to business community, not just in the U.S., but worldwide. Without the managed services community, I'm firmly convinced that the business community wouldn't have survived COVID-19 -- MSPs were responsible for airlifting something like 70% of businesses to work from home in a period of days, and that's not going away. Companies aren't going to say, 'They saved my business and did a great job delivering services, so now we're going to hire an in-house IT guy,' -- the transformation and market acceptance of MSPs and MSSPs has gone over that tipping point," Kujawa said.
And that's incredible cause for optimism.
