Zoho's pay freeze signals broader AI-led pressures for India's software industry

Summary

Zoho's profitability has come under pressure since FY23, the year OpenAI brought generative AI into the mainstream with the launch of ChatGPT in November 2022. While Zoho's profitability rose 3% in FY23, its employee costs jumped 49%.

New Delhi: Zoho Corp. co-founder Sridhar Vembu's Tuesday warning that the company will not give salary hikes this year amid artificial intelligence (AI)-driven disruption could signal broader challenges for India's software industry.

As Zoho's profits came under pressure amid a sharp rise in employee costs, Mint's review of the financials of software and software-as-a-service (SaaS) firms Darwinbox, TestMu (formerly LambdaTest) and LeadSquared also signals near-term profitability concerns across the information technology (IT) industry.

Darwinbox, which makes human resource (HR) management software, saw its net loss widen to ₹179 crore in fiscal year 2025 (FY25), according to the latest available financials. TestMu, which automates software development and testing processes, reported flat revenue and profit in FY25 -- with its earnings stagnating as generative artificial intelligence (AI) automated software testing. LeadSquared, which makes customer relationship management software, is the only one to have bucked the trend -- reporting a 17% year-on-year revenue growth in FY25 and cutting its losses by 39%, while reducing employee costs by 8.5% during the fiscal.

Zoho reported a 3% decline in net profit while employee costs rose 29% in FY25.

Software firms have come under pressure as AI automates an increasing range of business processes. In 2026, industry consortium SaaSBoomi dropped its annual growth projections for the sector for the first time in six years, a shift from its outlook just a year earlier when it projected India's SaaS industry would reach $50 billion in annual revenue by 2035.

Founded in 1996 in New Jersey, US, as AdventNet before being renamed in 2009, Zoho makes email, enterprise resource planning and workplace software for businesses. Vembu led the company as its chief executive officer (CEO) until January 2025, before stepping down to take the role of chief scientist.

At the time, Vembu said his focus will be on research and development as AI impacted the business. On Tuesday, Vembu said in a post on X that Zoho would freeze salary hikes this year as software firms grapple with AI-driven automation and cost pressures.

"We have cut down on our marketing budget. We have also told our employees that we cannot have our usual pay increase this year. I have apologized for not being able to avoid this. We will work hard to avoid mass layoffs but the outlook for software jobs in general is grim. We have not been growing our employee count for 18 months now," Vembu posted on X.

Growing impact

Zoho, which employs more than 30,000 people, is not the only software company grappling with AI's growing impact on the IT business landscape. San Mateo, California-based Freshworks, co-founded by former Zoho employee Girish Mathrubootham, laid off 11% of its workforce, or about 500 employees, on 5 May as part of a restructuring aimed at adapting its workforce to AI. In July 2025, Freshworks CEO Dennis Woodside told Mint in an interview that the company was changing its hiring strategy and repurposing existing employees as automation increasingly transforms how its software products are built and maintained.

Zoho reported ₹12,313 crore in operating revenue and ₹3,191 crore in net profit in FY25 -- its last filed financials with the ministry of corporate affairs.

Kashyap Kompella, founder of AI consultancy firm RPA2AI Research, said the advent of AI could put significant margin pressure on companies like Zoho in the near term.

"Most of Zoho's business model for its software against top tech companies is that of low-cost products. With automation lowering the cost of internal technology operations with clients, Zoho may be faced with having to compromise margins to retain clients -- thus putting its immediate business at risk," he said.

Zoho's profitability has come under pressure since FY23, the year OpenAI brought generative AI into the mainstream with the launch of ChatGPT in November 2022. While Zoho's profitability rose 3% in FY23, its employee costs jumped 49%. The story was somewhat similar in its latest reported fiscal, i.e. FY25, while employee costs rose 29%, profit fell 3%.

Mint could not ascertain whether Zoho's profitability declined further in FY26, as the company's filings for the year were not available at press time. The company did not respond to a detailed questionnaire emailed by Mint seeking comment on whether it plans to pivot, and how it plans to handle its employee costs.

"The business outlook for software is uncertain, and AI has raised costs dramatically with a massive 4-fold increase in server prices which we need for data centers, b) AI usage is increasing rapidly, leading to much higher expenses, which we are trying to control. On top of that is the challenging geopolitical backdrop," Vembu's 13 October X post further said.

Industry stakeholders have increasingly warned that with AI automating various software operations, low-value software platforms could face significant impact.

On 25 June, in an interview with Mint, Rajiv Ramaswami, president and CEO of San Jose, California-based software maker Nutanix, said that "only those software firms that make software that's essential to the core technology operation and cannot be replaced by automation processes will survive."

Ramaswami's warning came even as industry projections shifted goalposts. In March 2025, industry consortium SaaSBoomi projected that by 2035, India's software makers, such as Zoho, could capture 50% of a $100 billion domestic market in the country. Since then, the consortium has shifted its focus to measuring the impact of AI and has failed to publish a report dedicated to India's software industry for the first time in six years.

Abhisek Mukherjee, managing partner at strategic consulting and investment firm YCP India, said low-value software is the key near-term risk -- one that could extend to Zoho.

"Typically, any software maker is not directly at risk of imminently losing revenue, as despite AI, very few clients may internally automate the work that a certain software does. These clients have their own layer of data, which makes migrating software processes very difficult to undertake. For Zoho, however, a big challenge is that many of its clients are small clients, who aren't too reliant on custom data -- and may thus migrate rapidly to cost-effective solutions due to AI," Mukherjee said.