ServiceNow Inc. said today that one of its most prominent executives, CJ Desai, is leaving the company immediately after an investigation into a complaint over the sales process for a government contract revealed serious policy violations.

Desai (pictured) who was both president and chief operating officer at ServiceNow, was found to have violated the company’s internal policies over the hiring of the former U.S. Army Chief Information officer Raj Iyer, who has also left his position.

The surprise departures overshadowed strong financial results, with ServiceNow reporting better-than-expected sales and bookings in the second quarter, boosted by strong customer demand for its broad suite of enterprise software tools and services.

In addition to crushing Wall Street’s expectations, ServiceNow raised its full-year revenue outlook, sending its stock higher in late trading.

Surprise departure

The company said in a statement that Desai had chosen to resign following an internal investigation that was launched in March after it received an “internal complaint” regarding a government contract and one of its employees.

“The Company initiated an internal investigation, with assistance of outside legal counsel, into the validity of these claims,” ServiceNow said in a statement. “The Company also promptly informed and is continuing to cooperate with government entities.”

As a result of the investigation, which is still ongoing, the company concluded that its policies had been violated regarding the hiring of the former Army CIO.

Desai enjoyed a big profile at ServiceNow, and was perhaps just as well-known as Chief Executive Bill McDermott. He joined the company back in December 2016 as its chief product and engineering officer after quitting an executive role at EMC Corp., and had held the COO role since January 2022. He was consistently one of the company’s most-often quoted executives, communicating its regular product releases and updates and holding regular interviews with the press.

Rebecca Wettemann of the industry analyst firm Valoir said Desai’s departure comes at a critical time for ServiceNow, which is enjoying huge growth in the public sector and has an opportunity to continue doing that.

“While the circumstances of the hiring and the violation aren’t all clear, it was big enough to demand Desai’s departure,” Wettemann noted. “This is particularly important given ServiceNow’s focus on the public sector.”

The analyst explained that its critical for ServiceNow to maintain its credibility as a government contractor, given that it serves military branches, federal agencies, state and local governments. “With Desai’s departure, ServiceNow is taking a high-profile step to show it’s taking corrective action,” she added.

The company is also moving quickly to put the incident behind it. Chris Bedi, who has served at ServiceNow for over a decade, will assume the role of interim chief product officer immediately, while the company searches for a permanent successor. Bedi should be a solid appointment as he knows the company inside out, having previously served as its chief digital information officer and chief customer officer.

The company declined to elaborate on how an investigation into a complaint about procurement led to the discovery of a violation over the hiring of Iyer. In an interview with Barron’s, McDermott said the company is sharpening its hiring policies to make sure it always complies in future.

“That’s the whole story. It’s a hiring procedure, an isolated incident,” McDermott said. “We got out in front of it and we decisively channeled it.”

Earnings results crush analyst expectations

The news of Desai’s departure took the sheen off of ServiceNow’s impressive second-quarter financial results, which were disclosed today. The company reported earnings before certain costs such as stock compensation of $3.13 per share, well ahead of the $2.83 consensus estimate, with revenue growing by 22% to $2.63 billion versus the Street’s $2.61 billion target.

ServiceNow’s subscription revenue rose 23% to $2.54 billion, just beating the analyst forecast of $2.53 billion. Meanwhile, its current remaining performance obligations, which represents a backlog of orders expected to translate to revenue in the next 12 months, stood at $8.78 billion, up 31% from a year ago.

However, investors may have been disappointed to see that the company’s bottom line declined. It reported a net profit of just $262 million, down from $1.04 billion a year earlier.

In an interview with MarketWatch, ServiceNow’s finance chief Gina Mastantuono said the company’s strong results were thanks to momentum in generative artificial intelligence. She explained that the company’s Now Assist generative AI agent family has achieved the “fastest start of any ServiceNow product” and it’s proving to be useful for a broad range of customers. For instance, BT Ltd., formerly British Telecom, is leveraging Now Assist to reduce the time its customer service agents spend on calls.

McDermott said on the call that ServiceNow has been able to capitalize on AI because it has been investing in the technology for years, rather than just following recent trends and bolting it on.

“Our relevance as the AI platform for business transformation remains stronger than ever as CEOs are looking for new vectors of growth, simplification and digitization,” McDermott said.

Wettemann said ServiceNow’s success with AI is all about how it positions its Now Assist tools as putting AI to work for people and infusing intelligence into workflows.

“The theme of putting AI to work for people is really important as our research has found one in four workers worry their job will be replaced in the next year – and employees are much more comfortable with embedded capabilities that require minimal training than more complicated models,” Wettemann said.

Holger Mueller of Constellation Research Inc. said investors will find little to fault ServiceNow in terms of its performance, with the company now on track to surpass the $10 billion subscription revenue barrier.

“It’s a truly significant milestone for ServiceNow, and the only real concern for investors at the moment is the executive changes that were announced today,” Mueller said. “That’s because Desai has long had a big influence on its product organization. But the company has a deep bench, and should be able to find someone internally to replace him. Investors may have concerns because ServiceNow is delivering new functionality at high speeds and cannot afford any disruption at that velocity. Interim leader Chris Bedi will have to prove he’s capable of stepping up to the task.”

The company’s forecast was somewhat mixed, however. Officials said they’re looking at full-year subscription revenue of between $10.575 billion and $10.585 billion, above their prior range of $10.560 billion to $10575 billion. Though that’s promising, the third-quarter forecast is less so. ServiceNow said it sees subscription revenue of between $2.660 billion and $2.665 billion, below the Street’s $2.672 billion target.

Despite the blip in its current quarter forecast and the dip in profitability, investors appeared pleased enough with the company’s results, as its stock rose more than 6% in late trading, erasing a loss of 4% that occurred during the regular trading session.

Photo: SiliconANGLE