Microsoft and Alphabet/Google earnings statements and market forecasts have reinforced growing concerns about economic headwinds and a potential recession. Moreover, some MSPs are reporting IT product sale slowdowns, according to ChannelE2E conversations with multiple industry sources.
Still, the news isn't all bad. Among the silver linings:
- Demand for cloud and managed services generally remains strong, and IT project backlogs also appear strong.
- MSP valuations -- based on annual EBITDA (earnings before interest, taxes, depreciation and amortization) continue to hold up well, according to ChannelE2E conversations with buyers, sellers and deal makers.
Microsoft and Google: Quarterly Earnings, Forecasts and Economic Headwinds
Nevertheless, there are new economic and IT industry warnings signals that MSPs and channel partners should keep in mind:
- Microsoft stock dropped about 6% after the company forecast somewhat slower growth for its cloud business, and continued weakness for its PC-centric Windows business. But keep in mind: The cloud software giant is still growing. Top-line revenue was $50.1 billion in Q1 of fiscal year 2023, up 11% compared to Q1 of fiscal year 2022.
- Alphabet, parent of Google, saw its stock drop about 6% after the company announced weaker-than-expected search revenues. The actual figures: Q3 revenue was $69.1 billion, up 6% compared to the corresponding quarter last year.
The situation remains far worse in the hardware market, where Intel employees are bracing for potential layoffs as part of a closely watched October 27 earnings report. Multiple MSPs, meanwhile, tell ChannelE2E that they are seeing weakness in their hardware-oriented sales -- though IT project pipelines do remain strong, the service providers said.
MSP Valuations: EBITDA Multiples Holding Up Well
In the M&A market, MSP valuations also remain strong. Some of the world's largest MSPs have been recapitalizing their businesses at valuations of 16X annual EBITDA or more, sources tell ChannelE2E. Still, smaller MSPs are selling for anywhere between 3X and 8X annual EBITDA -- depending on quality of earnings, customer retention rates, revenue growth rates and other variables.
Still, M&A deals that involve debt are facing some valuation pressures. The reason: Amid rising interest rates, buyers have to spend more money to service debt and therefore have to potentially trim their offer prices for target MSP acquisitions.
Meanwhile, M&A deal flow also remains strong. ChannelE2E has tracked more than 900 M&A deals involving MSPs, IT consulting firms and the technology industry so far in 2022 (January through mid-October).
