Sonata Software sees Q4 revenue hit as top client pushes AI automation

Sonata Software's top client automating large parts of its outsourced business has led to a bigger-than-expected revenue fall and raised uncertainty over future growth

Sonata Software, a mid-tier information technology (IT) services provider, has said that revenue decline from its top client and cost pressure from clients due to uncertain macro impacted the fourth quarter of financial year 2024-25 (Q4FY25).

 

This has caused a huge amount of uncertainty going forward as Sonata is not sure if its customer will look to automate other parts of its outsourced business too, which can further lower its revenue and damage growth prospects.

 

Sonata’s announcement by an Indian IT service provider calling out on revenue loss due to increasing automation efforts taken by a client. Sonata has also said that such efforts pose a threat to small- and mid-sized companies that are often heavily reliant on a few customers for a bulk of their revenue.

 

“Our top client is a leader in artificial intelligence (AI) and wants to leverage it to bring down its cost by 30 per cent,” Jagannathan Chakravarthi, chief financial officer (CFO) of Sonata Software, told Business Standard. “In the third quarter, they ramped down a division of their services, which not only led to a revenue impact but also a headcount one as we had social security obligations and termination clauses. For the fourth quarter, we knew that there would be a degrowth, but it was more,” the CFO added.  Jagannathan declined to name the client but said it contributed about 20-25 per cent to Sonata’s international IT services business. Industry sources said the client to be Microsoft. For Q4, Sonata’s international IT services business reported revenue of ₹2,829 crore, and Microsoft contributed more than ₹700 crore.

 

The international IT services business revenue fell by 4 per cent in Q4 sequentially. The initial estimate was a hit of 3.5 per cent.

 

Sonata’s domestic business, which contributes 70 per cent to the top line, is about reselling product licences. Outsourcing engineers to clients, or the IT services business, makes up for the rest.

 

Microsoft has been spending billions of dollars to build its leadership under chief executive officer (CEO) Satya Nadella, and it comes as no surprise that the company would want to use AI to automate parts of its outsourced business to save costs. That would mean doing more for less for smaller firms, which in many cases would be unsustainable because of wafer-thin margins.

 

“They are assessing how much AI can replace the services we offer. Instead of us putting 50 people at their service, they are asking us to do it with 15 people,” Jagannathan added.

 

His comments highlight the real threat likely to emerge for smaller players going ahead. Many companies have already insourced a significant portion of their technology work to their global capability centres (GCCs) as they feel they can do it at a lower cost.

 

Jagannathan is not sure if the revenue contribution from the top client will continue to remain same or decline in the coming years due to loss of business. “We believe there will be no further degrowth in this account. But also uncertainties are very high and the impact may be immediate and visible. We will be able to manage this over a period of time with an agile response and focus on new-age technologies. But one of the opportunities lie in the space of AI and data which we want to leverage,” he said.