Sonata Software stares at revenue dent as Microsoft eyes direct licence sales

Sonata Software, which entered Indian IT’s $1-billion annual revenue club last year, is expected to get less business selling Microsoft licences, according to at least three people with knowledge of the matter.

According to experts, the IT services company gets more than $500 million from selling Microsoft product licences, making it one of the only large IT outsourcers to sell such licences. This translates to almost half of its $1.2 billion revenue in FY25.

“Microsoft has talked about, or they’re considering at least, going directly to a few large customers,” said Samir Dhir, managing director and chief executive of Sonata Software, in an interview with Mint on 26 June.

He said that the Bengaluru-based company considers this possible move as a threat.

“Is that a threat we see? The answer is, yes. Is that giving us sleepless nights? Perhaps not. It’s something that we’re watching cautiously. It might have a one or two quarter bump here and there,” said Dhir.

Analysts said Microsoft’s move is aimed at cutting costs.

“Microsoft is saying that for large clients who require more than 10,000-plus licences, they will go for direct billing because it is one way of cutting costs and they probably do not want the IT outsourcers to keep the extra cut that comes from selling these licences,” said Amit Chandra, IT analyst at HDFC Securities.

“This will be a gradual decision but Sonata is also de-risking it and focusing on selling more licences of other partners,” said Chandra.

Microsoft did not respond to Mint’s queries.

This move by Microsoft comes on the back of the tech company giving fewer tech services work to Indian outsourcers, including LTIMindtree Ltd, because of its own AI capabilities, according to Mint’s report on 4 May.

In a rare instance, Dhir called out lower revenue from one of its top clients, in a 16 April stock exchange, which Mint’s report revealed to be Microsoft.

He added that this is not the first time that Microsoft is trying to deal with clients directly.

“They have tried this model in the past as well. Okay, it hasn’t worked. So they’re trying again. It might work this time, it might not go this time,” said Dhir.

Sonata Software gets about 30% of its business managing back-end IT infrastructure for international businesses and the remaining 70% from selling software product licences to companies. Microsoft’s licence reselling business makes up most of that business followed by Google, Oracle and other such licences.

Sonata has about 7,000 employees, according to the company’s management. This translates to each employee fetching around $171,428 for the company, which is the highest amongst the country’s largest IT outsourcers. If indeed there is a hit in Microsoft’s licensing business, it will likely dent Sonata’s revenue per employee as three-fourths of the company’s business comes from selling software licences that need fewer people.

A second analyst attributed Microsoft’s move to client sensitivity.

“Microsoft is dealing with large clients directly because these are sensitive customers and Microsoft wants to keep its own dedicated sales and support staff for such accounts,” said a Mumbai-based analyst on the condition of anonymity.

For now, Sonata is not perturbed and is looking to widen its client base.

“We have anticipated this. We have been working on de-risking the business in multiple ways,” said Dhir. “So we’re not the top 10 Indian companies’ reseller. We are a top, I would say, probably about 400 to 500 companies’ reseller in India. And also, we have broadened the pyramid where we were selling (licences),” said Dhir.

He added that the company is also selling software licences of other companies including AWS, Oracle and Google.

Sonata has counted Microsoft as its client for more than 30 years and is among the top 1% of Microsoft’s partners, according to its FY24 annual report.

Microsoft, which follows a July-June financial year, ended its previous financial year with $245 billion in revenue. In other words, Microsoft is almost four times the size of Accenture Plc., the world’s largest IT services company, by revenue.

Lower business from Microsoft serves as a wake-up call for Sonata, which is now expected to lose business from its IT outsourcing unit to the licence reselling unit.

Homegrown IT services companies work with Microsoft in two ways.

One, as system integrators for Microsoft’s software products. If a burger chain wants to use Microsoft’s software to manage its sales and billing infrastructure, it can purchase the software from IT outsourcers like Sonata Software. Sonata will not just give the burger chain access to Microsoft’s software, but will also fit the software in its computers and earn extra money.

Secondly, IT service providers send engineers to Microsoft to manage its software products. These engineers ensure the functioning and backend requirements of Microsoft’s software sold to companies such as the ice cream chain.

For Sonata, both businesses from Microsoft are now under pressure.