AI widens SaaS–IT services divide; Persistent Systems

What happened

The artificial intelligence threat to software companies is no longer a uniform sell signal. Instead, it is creating a widening divide between SaaS platforms and the system integrators that build and implement them in a shift that could determine the next winners in India’s IT sector. SaaS companies are gaining market share over IT services in the AI era, according to global brokerage firm CLSA.

5 per cent of its revenue currently coming from Services-as-Software. The company expects that contribution to rise to 5 per cent of revenue by the end of the fiscal year. The brokerage also noted that companies in the high-tech vertical, including LTIMindtree and Persistent Systems, have flagged significant deflation from coding automation in the past.

Why it matters

While most SaaS companies have raised their guidance and delivered more stable earnings growth so far this year, the majority of Indian IT service companies have cut guidance. CLSA reiterated its high conviction outperform rating on Persistent Systems and outperform rating on LTIMindtree, arguing that both companies are showing clearer signs of adapting to the AI-led shift. 5 per cent upside.

CLSA said artificial intelligence is acting as a major efficiency tool for SaaS companies, leading to a sharp increase in revenue per employee. The improvement has been less pronounced among IT service companies. The brokerage said companies such as Capillary, Amagi Labs and Unicommerce have begun reallocating employees from software development and research-and-development functions toward sales and marketing.

By contrast, product engineering and implementation work around SaaS platforms remains vulnerable to automation. The difference is visible in recent guidance trends. 34 billion. Snowflake’s stock was up 41 per cent year to date, and Datadog’s had gained 56 per cent, according to the report. Salesforce has also infused Claude into its platform and launched Claudeforce, after which its stock saw a significant rerating.

Systems of record, such as SAP, Snowflake, Guidewire and the core CRM platform of Salesforce, are less vulnerable to direct replacement because they require accurate, consistent and deterministic outputs. Artificial intelligence can instead enhance these platforms by adding an interface over the underlying data layer. That distinction is important for investors. The AI opportunity is not simply a question of whether a company is a SaaS provider.

What to watch

Persistent Systems recently announced a $650 million deal win with a US technology client, which helped drive strong order-book growth. About half of Persistent Systems’ revenue comes from product and platform engineering, according to CLSA. Persistent has digital capabilities across hyperscalers and SaaS platforms, positioning it to benefit from the intersection of cloud, software platforms and AI adoption.

The company’s management has set revenue targets of $2 billion by fiscal 2027 and $5 billion by fiscal 2031. The brokerage wants Persistent to remain focused on these higher-value programmes rather than moving into routine managed-services work. The company has been proactively incorporating AI into its delivery solutions, leading to a strong increase in revenue per employee.