Sonata Software Loses Ground in India's IT Hierarchy
Bengaluru-based Sonata Software Ltd has experienced a significant setback, dropping two positions to become India's thirteenth-largest IT services company. This demotion follows a stark 30% sequential contraction in revenue during the second quarter of fiscal year 2026 (Q2 FY26), a decline largely attributed to a strategic shift by its key partner, Microsoft.
The Core Issue: Microsoft's Direct Sales Ambition
The heart of the problem lies in Microsoft Corp.'s new approach to market its software licenses. Historically, a substantial portion of Microsoft's licenses, like those from other major software firms, were sold through third-party resellers such as Sonata. However, the tech giant is now increasingly selling software licenses directly to large enterprise clients, bypassing intermediaries.
This change has had a profound impact on Sonata, for whom the software reseller business constituted more than 60% of its total revenue. While Microsoft has experimented with direct sales in other global markets, Sonata's management confirmed that this is the first instance of such a shift happening in Asia, marking a pivotal moment for the company's domestic operations.
Sonata reported a quarterly revenue of $242.8 million for the July-September 2025 period, down sharply from the previous quarter. This performance allowed competitors L&T Technology Services Ltd (LTTS) and Firstsource Solutions Ltd to overtake Sonata, with the latter joining the prestigious 'one billion club'. LTTS posted a robust $337 million in revenue, while Firstsource reported $265 million.
Beyond Seasonal Weakness: A Deeper Financial Slump
Analysts point out that the current downturn cannot be dismissed as mere seasonal weakness, which the second quarter traditionally represents for Sonata due to lower license sales. The company's revenue declined by 6.3% on a yearly basis, its lowest performance in at least three years. Furthermore, the sequential revenue drop in the last quarter was more than double the decline experienced in the same period a year ago, when the company had reported $259 million in Q2 FY25, down 14.5% sequentially.
This is the fourth significant reshuffle in the Indian IT pecking order within a year, raising concerns among investors who are already wary of macroeconomic uncertainties and the impact of automation on the country's $283 billion IT industry.
The warning signs were visible earlier. Mint had first reported on July 3, 2025, that Microsoft's new direct sales approach could adversely affect Sonata, which derives approximately $500 million in revenue from its partnership with Microsoft. Phil Fersht, Chief Executive of HFS Research, noted that a restructuring within Microsoft likely accelerated this impact, highlighting that Sonata's domestic resale revenues have historically been more volatile than its international IT services business.
An Existential Question and the Path to Recovery
The situation has escalated into what analysts describe as an existential crisis for Sonata and similar firms. "Microsoft specialist services firms like Sonata are facing an existential question: what's the value proposition when the software vendor owns the customer relationship directly?" Fersht stated. He emphasized that the answer must evolve from simply helping clients purchase Microsoft products to demonstrating superior value in extracting outcomes through services, integration, and expertise that Microsoft itself does not provide.
Peter Bendor-Samuel, founder of Everest Group, echoed this sentiment, stating that the pure value-added reseller (VAR) model is not sustainable in the long run. He advised that Sonata must now focus on value-added and adjacent services to secure its future.
The company's leadership has acknowledged the threat. On June 26, CEO Samir Dhir had pointed out Microsoft's new approach as a potential risk. However, during the post-earnings analyst call on November 14, Chief Financial Officer Jagannathan C.N. expressed uncertainty, noting a lack of clarity from Microsoft. "As of now, although they (Microsoft) have not given anything in writing, our guess is that worldwide they are trying to have some direct contracts with a limited number of very, very large accounts," Jagannathan said. He added that the company is not in a position to comment on the future as Microsoft's exact plans remain unknown.
In response, Sonata is now aiming to diversify its customer base for software licenses. However, analysts caution that this transition will take time and will continue to put pressure on the company's topline in the near future. Both HFS Research and Everest Group recommend that Sonata must expand its global IP-led offerings and double down on analytics and AI services to diversify away from the volatility of the licensing business.
The market has reacted strongly to these developments. Shares of Sonata Software have plunged 38.16% since the start of the year, closing at ₹370.85 as of the latest data. Emails sent to both Sonata Software and Microsoft seeking comments on the matter reportedly went unanswered.
