Sonata Software drops two ranks in India IT industry as reseller business from Microsoft shrinks

Such software reseller business used to make up for more than 60% of Sonata's revenues. Microsoft, like other large software companies, had earlier sold much of its licences through third parties such as Sonata. Now, it is looking to sell to large clients directly. While this has happened in the past, Sonata’s management said it’s a first in Asia.

Bengaluru-based Sonata, as a result of its topline contraction, is now the country’s thirteenth-largest IT outsourcer after it lost ground to L&T Technology Services Ltd (LTTS) and Firstsource Solutions Ltd after a lacklustre July-September 2025 period.

Sonata reported $242.8 million in revenue for the quarter on Friday, down 30% sequentially. Most of this decline was caused by lower revenue from the domestic business, which is primarily from selling software licences.

In contrast, LTTS and Firstsource – the latter was the latest entrant into Indian IT’s one billion club – ended the second quarter with $337 million and $265 million revenues, respectively.

A fourth rejig in Indian IT’s pecking order within a year’s time might stoke fears in investors’ minds, who are calculating risks posed by macroeconomic uncertainties and automation tools reducing jobs in the country’s $283 billion IT industry.

While the second quarter has traditionally been a seasonally weak quarter for Sonata because of fewer licences sold, the current decline goes beyond seasonal weaknesses.

For one, the company’s revenue declined 6.3% on a yearly basis, its lowest in at least three years. Even its sequential revenue decline last quarter was more than double in the year-ago period. Sonata ended the second quarter of the last fiscal with $259 million in revenue, down 14.5% from the preceding quarter.

Microsoft goes direct

Mint had first reported on 3 July that Microsoft’s approach to sell its licences directly might impact Sonata, which gets about $500 million in revenue from Microsoft.

At least one analyst said Microsoft's restructuring accelerated this impact.

“The annual (revenue) decline suggests more than seasonal weakness. The Microsoft restructuring likely accelerated the impact, and Sonata’s domestic resale revenues have historically been more volatile than its international IT services business," said Phil Fersht, chief executive of HFS Research.

Sonata gets about 40% of its business by managing back-end IT infrastructure for foreign companies and the rest from selling software product licences to companies. The business from Microsoft makes up most of that business. Sonata also sells licences of Google and Oracle’s software.

On 26 June, Sonata chief executive Samir Dhir had pointed out to Mint that Microsoft’s new approach was a threat to the company. The company management cited further lack of clarity from Microsoft in the September quarter.

“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 of theirs or large customers…. So, in that list there may be few which will fall in India and it can fall into our customer basket as well," said Sujit Mohanty, CEO of Sonata Information Technology Ltd, a group company that handles the domestic business, on a post-earnings analyst call on 14 November.

During Mint’s June interaction with the company’s management, Dhir had stated that delays in decision making by a large customer had hit its IT services business with Microsoft and that it would have a “one or two quarter bump here and there".

However, last week, the Sonata Information Technology CEO flagged some uncertainty on this count as Sonata has not yet heard from Microsoft.

“We have to wait and see how things are going to pan out and to what extent they're (Microsoft) going to go and we are not in a position to make a comment on that because obviously we don't know what exactly their future plan," said Mohanty on the call.

Turning the ship

For now, the company is prioritising growth from its Microsoft account in its domestic business, a company spokesperson said, noting “our partnership with Microsoft remains strong and stable".

Sonata's focus will be on accelerating growth in the small, medium, and corporate segment, scaling the cloud business, and expanding Microsoft-led opportunities, the spokesperson added in an emailed reply to Mint's queries.

The company acknowledged that Microsoft's direct dealing with certain clients resulted in headwinds for its domestic business.

"For our Sonata India business, Q2 is typically a seasonally soft quarter, and this year followed that pattern. We also experienced some headwinds as a few clients increased their direct engagement with Microsoft," said the company spokesperson.

Sonata aims to diversify its base of customers to whom it sells software licences.

Still, this might take time and there will be pressure on the topline. "Microsoft’s decision to sell licences directly to its biggest Indian enterprise customers cuts out intermediaries like Sonata from high-volume, low-margin reselling activity," said HFS's Fersht.

Sonata does not call out revenue from its top clients for its overall business.

A second analyst said this does not bode well for Sonata.

“They need to focus on value-added services and adjacent services. Any Var (value-added reseller) business model is not sustainable over the long run," said Peter Bendor-Samuel, founder of Everest Group.

Value-added resellers like Sonata customize and sell Microsoft software to clients and can even modify them further.

Fersht added that Sonata now faces an existential crisis.

“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? The answer can't be, ‘We help you buy Microsoft products.’ It has to be, 'We help you extract outcomes from Microsoft products through services, integration, and expertise that Microsoft won't deliver,'" said Fersht.

Shares of Sonata have plunged 38.16% since the start of the year to ₹370.85 as of Monday. An email sent to Microsoft on Monday remained unanswered.

Both analysts mentioned above said the company must expand its global IP-led offerings and double down on analytics and AI services, which will help the company diversify away from licensing volatility.

(The story was updated to correct the name and title of an executive quoted in it and to add comments from a company spokesperson.)