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Business Standard

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

Sonata Software, a mid-tier IT services provider, said revenue decline from its top client was worse than anticipated during the fourth quarter of FY25, as the client looked to automate a significant portion of the business it previously outsourced. This shift has created considerable uncertainty, with Sonata unsure whether the client will automate further portions of its outsourced business—potentially impacting future revenue and growth prospects. Sonata's disclosure marks the first time an Indian IT services firm has publicly flagged revenue loss directly attributable to a client's automation strategy. The development poses broader implications for small and mid-sized firms that often rely heavily on a handful of customers for a large share of their income. 'Our top client is a leader in AI and wants to leverage it to bring down its cost by 30 per cent,' said Jagannathan Chakravarthi, chief financial officer, Sonata Software, in an interview with Business Standard. 'In the third quarter, they ramped down a division of their services, which not only impacted revenue but also headcount, as we had social security obligations and termination clauses. For the fourth quarter, we anticipated a decline—but it turned out to be steeper.' While Jagannathan declined to name the client, he said the account contributed about 20–25 per cent to Sonata's international IT services business. Industry sources identified the client as Microsoft. In the fourth quarter ended 31 March, Sonata's international IT services business reported revenue of Rs 2,829 crore, with Microsoft contributing over Rs 700 crore. Revenue from the international IT services segment fell 4 per cent sequentially in Q4 to Rs 702 crore, versus an earlier estimate of a 3.5 per cent decline. Sonata's domestic business—which contributes around 70 per cent of the company's total revenue—is largely focused on product licence reselling. Its IT services business, including outsourced engineering services, accounts for the remainder. Microsoft, under CEO Satya Nadella, has significantly expanded its AI capabilities with large-scale investments. It is expected that the company would automate outsourced workstreams to reduce costs. For smaller IT vendors, this implies doing more with fewer resources—a challenging proposition given their 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,' Jagannathan said. Jagannathan admitted there is uncertainty around whether the revenue contribution from the top client will remain stable or decline further. 'Uncertainties are very high, and the impact may be immediate and visible. We will be able to manage this over time with an agile response and a focus on new-age technologies.'