Service Leadership Inc. has released the latest Service Leadership Data Report for the second quarter. The report unveiled significant insights into the global managed service provider (MSP) industry and has determined that managed service revenue growth has slowed down to pre-COVID levels, but MSP profitability has remained at historic highs.

According to the report, managed service revenue growth experienced 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 been declining for four consecutive quarters. Australia/New Zealand witnessed its peak in Q1 2024 and is expected to follow the same pattern.

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. Private equity (PE)-backed MSPs also achieved their highest level in eight quarters, with an impressive 18.7% adjusted EBITDA.

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 non-private equity backed counterparts.

Furthermore, the report highlights a positive trend of fewer MSPs operating at a loss. In Q2, 16% of MSPs reported a loss, down from 19% in Q1 2024.

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.

In addition to the MSP segment, the report also sheds light on interesting data for value-added resellers (VARs). Total revenue for VARs experienced a positive quarter, growing by 3.5% after two consecutive quarters of negative growth. However, revenue growth varied significantly across different VARs. The best-in-class and median profitability VARs both achieved total revenue growth of over 7%, while the bottom quartile VARs saw a decline of -7.3%.

VAR revenue growth benefited from a 4% increase in Q2, following two consecutive declining quarters. However, project/professional services revenue for VARs dropped by 4.3%, marking the third consecutive quarterly decline.

"The Q2 Service Leadership Data offers invaluable insights into the dynamic landscape of the MSP and VAR industries," said Peter Kujawa, vice president and general manager, Service Leadership. "These findings serve as a compass for industry professionals, empowering them to make informed decisions and fuel growth within their businesses. Despite the current slowdown, it is noteworthy that MSPs, particularly those backed by private equity, continue to achieve record-breaking profitability."

For more information and to access the complete Q2 Service Leadership Data Report, please click here.