Recession Begins to Impact Managed Service Providers

Recession Begins to Impact Managed Service Providers

Nimsoft CEO Gary ReadNimsoft CEO Gary Read (photo, right) sounds like a lot of the executives I've interviewed lately. Although Nimsoft is growing and remains cash flow positive, customers and managed service providers are delaying purchasing decisions amid the recession, Read told me today. Read's statements coupled with anecdotes from across the MSP industry provide an important reality check.

Simply put, the managed services market is not immune to the recession. Although the best MSPs continue to grow, most deals are taking longer to close, and it's increasingly difficult for MSP software providers to forecast their future financial performance, according to multiple sources I've interviewed.

First Quarter Results

Nimsoft earlier today announced first quarter financial results that featured an increase in total bookings and GAAP revenue, combined with positive cash flow. According to a company statement:
Nimsoft's success was driven by strong growth in sales to Managed Service Providers (MSPs) and mid to large corporate enterprises. The company added 19 MSPs in the quarter increasing order backlog by 78 percent over the same period last year. At the same time, Monthly Recurring Revenue (MRR) was up 54 percent year on year.
At first glance, all of those data points are good news. But take a closer look, and you'll discover that the press release is pretty humble compared to earlier Nimsoft statements -- such as this January 2009 release, which trumpeted record quarterly results.

Roughly a year ago, Nimsoft rival Kaseya stopped issuing quarterly financial statements. As a privately held company, Kaseya didn't need to publicly discuss its financial results. But the bigger issue: I think Kaseya anticipated slowing MSP industry growth, particularly in North America, and decided to stop disclosing its results ahead of the slowdown. The last financial statement I saw from Kaseya was issued in January 2008.

Slowing Growth for All?

The big question:
  • A) Is slowing growth a challenge only for Nimsoft?
  • B) or are we seeing slowing growth across the board for most of the major MSP software providers?
There's no doubt in my mind that the answer is choice B. Let's keep that answer in perspective: We're still talking about growth for many MSP software companies. But it's not hyper growth, and I believe most of the revenue growth is coming from international opportunities rather than the North American market.

The Story At Nimsoft

Based on recent financial trends, Nimsoft is adjusting its business for 2009 a bit.

"We're still seeing a lot of interest and we've got more 'activity' than ever before in our history," said Read. "But on the not-so-positive side, we're seeing a lot of customers not making decisions. They're sitting on their hands and trying to put it off."

Two cases in point: Last week, as Nimsoft was closing its first quarter, two "pretty decent sized MSPs" said they had selected Nimsoft's software but were going to revisit an actual purchase decision in April or May, according to Read.

On the staffing front, Nimsoft has eliminated some positions related to telemarketing. But the company is still hiring in such areas as marketing, sales leadership and business development. "There is no hiring freeze," asserted Read. His best guess is that Nimsoft's staff will grow by about 10 percent this year, but Read says the situation is fluid and could change on a quarter-by-quarter basis.

On the funding front, Read says Nimsoft is fully funded and has no need to raise more money from venture capitalists. In fact, Nimsoft added cash to its balance sheet in Q1, and Read is watching the market for potential acquisitions.

"A company a day comes across my desk looking to be sold," said Read. "We want to be an acquirer in this environment. But it has to be the right opportunity."

The Bigger Picture

Generally speaking, I think most MSP software providers are striving for responsible, double-digit growth in 2009 while keeping a cap on costs.

But the boom times of 2007 and early 2008 are over -- at least until the economy recovers. Autotask CEO Bob Godgart believes MSPs have cut their headcounts by about 3 percent in recent months. And new hires are receiving extra-long scrutiny, as MSPs consider their cash flow.

Too Much Too Soon?

Another big fear of mine: I'm beginning to think that some MSP software providers have over-sold the US market -- pushing more licenses on MSPs than they actually need. It's similar to the ERP shelfware problem of the 1990s, where big companies wound up buying far more software than they actually needed.

Fortunately, the SaaS business model could mitigate the MSP shelfware problem. Generally speaking, MSPs can use SaaS to ensure they're only using the number of software licenses they actually need.

Still, there are thousands of on-premise MSP software deployments across the US. We could be facing a double-whammy, where software companies can't sell more on-premise licenses to MSPs, because the MSPs themselves are still trying to digest excess licenses they didn't need in the first place.

Balanced Perspective

Now that I've expressed my concerns, let's remember that the overall managed services market remains strong. And it's growing at a time when worldwide IT spending will drop nearly 4 percent in 2009, according to Gartner.

Successful MSPs continue to believe in their business models. More than 300 MSPs paid to attend Autotask's first customer conference last week. And additional conferences from a range of MSP-focused technology companies appear on schedule for 2009. Those conferences wouldn't exist if the best MSPs were imploding.

Generally speaking, MSP tools are mature and reliable. And many MSP software providers continue to grow. Still, balanced statements from Autotask's Godgart and Nimsoft's Read should help us all to remember that the MSP industry isn't immune to the economy around us.

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TAGS: Financing
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