10 Findings from Channel Futures' MSP Quarterly Survey: Profit Outlook Positive Despite Macro Challenges
Cybersecurity grew significantly among MSPs, but AI adoption didn't grow as much as one expert expected.
March 17, 2023
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There is no doubt many channel partners had incredible growth through the pandemic, with the fourth quarter of 2021 the high-water mark in terms of partners who grew recurring revenue more than 11% year over year. But MSPs kept the momentum going in 2022 with 21% growth, the highest we have recorded. In the fourth quarter, 21% of MSPs said they saw sales/revenue growth of 20% or more.
Our MSP Channel Sentiment Survey found that 39% of respondents had recurring revenue growth of at least 11%. The hyper-growth MSPs, which numbered some 21% of our survey respondents, had a blowout year with growth of more than 20%. A good percentage (24%) said their recurring revenue grew by 1-10%, with 15% finishing the year flat. All in all, 63% of those we surveyed saw positive growth quarter over quarter, with the comps being fairly high given the pace of business through 2021.
Not everyone prospered in the fourth quarter for a wide range of reasons. As Peter Kujawa, vice president and TSP evangelist at Service Leadership, has stated, MSPs with solid business models and financial management have been the true winners of the past two years, while those that did not shore up their P&Ls have not shared in the good fortune of their peers.
The survey did show that some MSPs finished the year flat or with modest, and in some cases, severe declines. Of our Channel Futures Channel Sentiment respondents, 15% said their recurring revenue was flat for the quarter, with another 13% saying their sales of recurring services dropped by 1-10 percentage points. A small group, some 9%, suffered declines of 11% or greater, which puts their future in doubt going forward.
The culprit could have been cloud-related sales, as some 31% of the respondents said cloud sales were unchanged quarter over quarter. Nine percent said cloud sales dropped between 1% and 20%, or more. The net is that 40% of our respondents said cloud sales in the fourth quarter did not grow.
Although a large portion of MSPs saw cloud growth stay stagnate, a larger portion saw growth in cloud-related sales.
Thirty-four percent of MSP respondents listed cloud as one of the technologies where they saw their biggest gains in Q4. Cloud trailed only cybersecurity (46%). Only 9% of partners reported a year-over-year decrease in cloud-related sales in Q4.
“Customers were never looking for cloud solutions, and quite frankly most small to midsize customers don’t need or want monthly services which they cannot control,” one respondent wrote.
On the other hand, 59% reported increased cloud-related sales. Another 31% reported no change year-over-year.
Although public sentiment has wavered on whether or not businesses will slow down on infrastructure-as-a-service spending, MSPs report solid sales growth in cloud.
Sixty-four percent of MSPs said their security sales increased year-over-year, compared to 58% in Q4 and 55% in Q3. Moreover, 20% of MSPs said theirs increased more 20%. That’s the most they’ve ever reported for that category. The image above show how cybersecurity sales have shifted over the last eight quarters.
Managed security also represented the most common area (43%) where MSPs added vendors.
The biggest question that has always surrounded the channel is around profitability. Everyone wants to understand just how profitable the MSP business is because of its recurring revenue foundation and margin potential.
The Channel Futures MSP survey found that 2022 profit outlook was at its highest level since the survey began, with 23% of the respondents reporting profit gains of more than 20%, compared to only 13% reporting the same range of gains in 2021. MSP profitability last year breaks down this way: Twenty-four percent reported their profits grew 11-20%, with one-quarter posting gains of between 1% and 10% on their bottom line. In total, 72% reported that profitability was expected to grow significantly in 2022.
Still, last year was not all roses for the overall MSP community, as 11% reported that profits remained unchanged year over year. While 10% said profits fell between 1% and 10%, a small percentage expected profitability to plunge by at least 11%. Those declines could be the result of investments in new initiatives, competitive pressures, or the overall rise in talent costs among other factors will rocked the channel last year.
Fourteen percent of MSPs listed artificial intelligence as one of a top area for Q4 technology gains. That actually decreased from Q3 (17%) and Q2 (19%), which is a surprise considering popularity of ChatGPT.
“Only 14% were paying attention in Q4 to the buzziest shift in technology we’ve seen in ages,” MSP Radio owner Dave Sobel said.
“Remember, ChatGPT hit its first million users in record time, taking just five days to get to that number. In January, it hit 57 million, and 100 million in February,” Sobel told Channel Futures.
Sobel cited a Fishbowl study that showed approximately 70% of employees leveraging ChatGPT at work haven’t disclosed the use to their bosses.
“This is Shadow IT on speed … Don’t be on the sidelines,” Sobel said.
Microsoft in January announced its plans to own 49% of ChatGPT parent OpenAI.
When asked to list the technologies that “cooled off” in Q4, 22% of MSPs listed servers, more than any other technology. And that’s the highest servers have ever scored on this question.
Moreover, 18% specified that server hardware sales slowed down.
IDC last December predicted that the worldwide server market will slow in terms of spending in 2023. However, the research firm noted that the industry will see a CAGR of 10.2% over the next five years.
Analysts Juan Seminara and Viranart Chandarasanti wrote that supply chain issues have challenged the server market. They also cited high inflation and geopolilitical issues like the Russian invasion of Ukraine.
“However, the server market has proven very resilient in recent years, as IT infrastructure has evolved from a nice-to-have to a mission-critical investment for many organizations,” they wrote.
MSPs most commonly selected (25%) their toughest challenge as expanding their customer base. This has been the most common challenge for the last five quarters.
Twenty-one percent of partners listed product supply, which dominated so many conversations in the partner and vendor world last year.
Although companies like Cisco and ScanSource reported positive developments in the supply chain, partners are still looking for the delays to shorten. A lower number, 13% of partners, said product supply was a top issue in Q3.
“The ETAs for products is heating our business,” one respondent wrote.
Hiring proved a difficulty for 19% of respondents.
“It is increasingly difficult to hire competent employees,” a respondent said.
In the meantime, marketing continues to steadily drop as an area of concern for MSPs, with only 6% of partners flagging it as an issue.
MSPs harbor very different sentiments about the health of the channel and the health of the larger economy.
Seventy-two of MSPs rated their confidence in their industry as good or excellent, while only 44% rated their confidence in the economy as good or excellent.
Meantime, only 5% of MSPs rated their confidence in the industry as poor or terrible, while 22% of MSPs rated their confidence in the economy as poor or terrible.
The majority of partners saw their sales and profit margins to go up in 2023.
On the sales side, 25% of partners forecast 2022 sales to increase by more than 20% in 2022. Another 25% expected them to go up by between 11% and 20%. You get 74% when you add those numbers to the partners who expected their sales to go up by between 1% and 10% in 2022.
And the average profit outlook moved in a relatively parallel direction. Twenty-three percent of partners forecast profit to expand by more than 20% by the end of 2022. Twenty-four percent forecast it to increase by between 11% and 20%. Finally, another 25% expected profit to increase by between 1% and 10%.
The majority of partners saw their sales and profit margins to go up in 2023.
On the sales side, 25% of partners forecast 2022 sales to increase by more than 20% in 2022. Another 25% expected them to go up by between 11% and 20%. You get 74% when you add those numbers to the partners who expected their sales to go up by between 1% and 10% in 2022.
And the average profit outlook moved in a relatively parallel direction. Twenty-three percent of partners forecast profit to expand by more than 20% by the end of 2022. Twenty-four percent forecast it to increase by between 11% and 20%. Finally, another 25% expected profit to increase by between 1% and 10%.
By James Anderson and Bob DeMarzo
Although supply chain challenges and other macroeconomic issues continue to rankle managed service provider (MSP) organizations, the majority of partners are forecasting sales and profit growth in 2023.
Channel Futures’ recent MSP Market Pulse and Channel Sentiment survey showed demonstrated the optimism – and pressures – many partners are feeling.
A wide disparity exists between how MSPs feel about the health of the U.S. economy and how they feel about their own businesses’ prospects. On one hand, geopolitical events like the pandemic and Russia’s invasion of the Ukraine continue to cause a ripple in the channel. Partners report that product shipping delays still hamper their businesses.
Canalys’ Jay McBain
Nevertheless, economic challenges haven’t shaken partners’ place as an indispensable resource for their customers. For example, 72% of MSPs reported good or excellent confidence in the health of their industry. The majority of MSP leaders also reported growth in their year-over-year profit. Strong gains in cybersecurity helped MSPs forget about some of the challenges they faced selling server hardware.
“A couple of years ago, I would have said this is a $200 billion market. It’s a solid, double-digit growing business. We’re in the right industry,” Canalys chief analyst Jay McBain told an MSP audience NerdioCon. “Software is eating the world; every other company in 27 industries is becoming a tech company. This is the right place to be this decade.”
Channel Futures compiled 10 key findings from the survey of 118 MSP leaders in the slideshow above.
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