CIS-RCI learner - ServiceNow Certified Implementation Specialist ? Risk and Compliance (CIS-RCI) Updated: 2024

• Chris Bedi is ServiceNow's chief digital-information officer. 
• "We know we're early innings, especially with gen AI, but we are pushing on it hard."
• Bedi's insights are part of Business Insider's year-end leadership series, "Looking Ahead 2024."

For the cloud-software provider ServiceNow, this year's advances in artificial intelligence have opened a lot of doors.

The software-as-a-service provider is "aggressively pursuing our ambition to absolutely be an AI-first company," Chris Bedi, the chief digital-information officer at ServiceNow, told Business Insider. "We know we're early innings, especially with gen AI, but we are pushing on it hard."

The $140 billion company's cloud-based offerings include service management, operations management, and business management. And Bedi said he knows that if generative AI, or gen AI, is used correctly, it will save hours of work and help bolster the careers of workers using it.

Part of integrating and understanding AI is training ServiceNow's 22,000 employees. The company had its first AI learning day recently, which brought the whole company together. It included panels of both internal and external speakers to "demystify it a bit and deliver a learning path," Bedi said.

While ServiceNow focuses on gen-AI solutions and use cases, it also measures employee satisfaction. "Do they feel like it's actually additive to their job or is it kind of a nonstarter?" Bedi asked.

"Humans don't necessarily run to the technology — they sometimes run away from it," he said. "We're trying to move fast while we're bringing our human capital along."

Bedi said teams involved in IT, HR, and customer-support operations don't feel threatened by generative AI. "Their sentiment is around 64% of them believe it's helping boost productivity," he said.

The teams that heavily rely on gen AI are seeing "it's freeing up 25% to 30% of their time, but we're using that time so they can serve our clients better. So they're actually viewing it as a career progression for them."

The challenge that ServiceNow and all companies face is around fast innovation, "but also we take care of governance, safety, and ethics" around AI, Bedi said.

ServiceNow wants to "create better experiences because we all know experiences done the right way can drive the right behavioral and economic impacts." The company also said, "we shouldn't have any decision made without an accompanying AI-based recommendation," Bedi added.

Bedi's insights are part of BI's year-end leadership package, "Looking Ahead 2024," which digs into vision, strategy, and challenges across corporate America.

The following interview has been edited for length and clarity.

What are you looking forward to most for 2024?

I'll use one word: innovation. I think that there is so much technology capability available to CIOs and CTOs around the world, and just using all of it to innovate in a way that serves customers better, drives the company forward, frees employees up from the toil they've been in. That, to me, is going to be really fun.

What is your biggest concern for 2024?

I'll be the broken-record CDIO and say cyber. It's just not getting easier [protecting against cyber attacks and data hacks], it's getting harder. And so that's one thing, but also data [can also be manipulated] which then change algorithmic outputs, data labeling, wipeouts — stuff like that. I worry about threats which are yet to emerge.

What is one thing you think you got right in 2023?

We started experimenting and doing stuff with gen AI super early. And it's yielding benefit now because we're alive on like 15 things across five or six departments. So jumping on it early.

What is one thing you think you got wrong in 2023?

I would say underestimating how quickly gen AI would progress. It went a lot faster than I thought. It's amazing to think that it was just last November, December. And the speed has been amazing.

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Someone forgot to tell ServiceNow (NOW -0.51%) that the cloud software industry has been slowing down in 2023. The digital transformation platform's revenue growth has actually been accelerating throughout the last year, and the stock has picked up steam as 2024 approaches. Shares of ServiceNow are up 80% in 2023 with just weeks left to go until the new year.

A high valuation has prevented many investors from pulling the trigger on buying this top cloud stock. After an epic run, is it still a top buy for 2024?

A next-gen platform for the future of work

ServiceNow provides numerous solutions for businesses to manage their workforce and customer experiences. Its platform spans digital workflow management tools, from AI that helps find bottlenecks that are slowing down the completion of tasks to cloud observability solutions that help with app performance.

ServiceNow landed on the radar of many investors this past summer after an expanded partnership was struck with Nvidia. ServiceNow said it would adopt Nvidia's latest and greatest AI systems to Boost its own platform, and in turn, Nvidia would expand its use of ServiceNow in its own workflow management for developing more powerful chips and generative AI systems.

This type of AI used to automate more employee tasks is powering "digital transformation" among big customers. In a year like 2023 where cost-cutting has been a top priority in the corporate world, it's helped keep demand high for ServiceNow's software. And, after the bear market of 2022, the company's revenue growth has been ratcheting up again.

Data source: ServiceNow. YOY = year over year.  

Even better, though, has been ServiceNow's rapid progress on profitability. Generally accepted accounting principles (GAAP) income from operations was $492 million in the first nine months of 2023, compared to just $200 million in the same period in 2022. Free cash flow (FCF) was $1.36 billion in the first nine months of 2023 (a healthy FCF profit margin of 21%), with the discrepancy between GAAP profitability primarily driven by employee stock-based compensation.

As for that employee stock-based compensation, ServiceNow management reported it repurchased $282 million worth of stock in Q3 2023. This is part of the company's first-ever stock repurchase program, which is aimed at offsetting the impact of dilution from ongoing employee stock-based compensation. About $1.2 billion worth of stock repurchase authorization remained at the end of the quarter.

Expect some turbulence, but a top cloud stock for the long term?

After the big run-up in stock price in 2023, ServiceNow trades for a high premium of 90 times trailing-12-month earnings per share, or about 60 times trailing-12-month FCF. Of course, part of the premium exists because ServiceNow's profit margins are expected to rise rapidly over the course of the next few years. To wit, shares trade for a bit more reasonable 55 times Wall Street analysts' expectation for 2024 earnings per share.

ServiceNow is nevertheless an expensive stock as we head into the new year. That can cause some turbulence in stock price, including steep sell-offs if ServiceNow misses some short-term financial estimates from one quarter to the next.

However, given the company's fast-and-steady growth for years, and leadership in cloud-based and AI-powered software, investors are rightfully optimistic about the business's trajectory. As I explained this time last year, I think a stock like ServiceNow is best bought in batches over the course of time, perhaps using a dollar-cost averaging plan. This still seems like the right strategy for those investors interested in the long-term potential (a decade and beyond) for ServiceNow.

Varun Badhwar, the CEO and co-founder of Endor Labs contends that as most organizations stand at the intersection of AI and enterprise control, malicious actors will continue to explore using AI and associated tools to accelerate exploitation and intrusions. They will also look to target the large GenAI platform providers and widely used AI OSS projects/components as part of broader software supply chain attacks.

“In a rapidly evolving technological landscape, the parallels between the adoption of cloud services and the current surge in artificial intelligence (AI) implementation are both striking and cautionary. Just as organizations eagerly embraced cloud solutions for their transformative potential in innovation, the haste of adoption outpaced the development of robust security controls and compliance tools. Consequently, this created vulnerabilities that malicious actors were quick to exploit, leaving enterprises grappling with unforeseen challenges,” warns Badhwar. “As we witness a similar trajectory in the adoption of AI technologies, it becomes imperative to draw lessons from the past and proactively address the looming concerns. The rapid integration of AI into various facets of business operations is undeniably transformative, but the lack of comprehensive visibility and enterprise control raises red flags.”

Badhwar adds: “In an era where data is a prized asset and AI is a powerful catalyst for business growth, the responsibility lies with industry leaders, policymakers, and technology providers to collaboratively build a foundation for responsible AI adoption. By establishing comprehensive controls and fostering transparency, we can unlock the full potential of AI while safeguarding the interests of organizations and their stakeholders.”

There will be an increase in new founders using AI to solve society’s challenges, predicts Kaarel Kotkas, the CEO and founder of Veriff, saying the responsibility for AI’s positive influence on society resides with security leaders.

“New founders are in a prime position to solve complex problems and societal issues with AI solutions. As digital natives, this generation of entrepreneurs has the innate ability to understand AI, its applications, and how it can influence the digital age - for better or worse,” says Kotkas. “For example, in 2023, fake identities and deepfakes became a significant challenge to identity verification - 85% of all fraud in 2023 was impersonation fraud. But, despite the threats it can pose, AI is also applied to provide fast and accurate verification and authentication of real users. While the AI threat landscape constantly evolves, we should look to these new leaders to ensure their companies are equipped to easily implement new techniques to solve major challenges ranging from security to predictive analytics to user authentication.”

The Topic on everyone’s minds this year was generative AI — moreover what the potential security threats and risks are from its existence and usage. The discussions will only intensify according to Kev Breen, who is the Director of Cyber Threat Research at Immersive Labs where he researches new and emerging cyber threats.

“Fear-mongering headlines flashed AI's security risks instead of providing tactful ways to incorporate the technology into their organizations. Security leaders and practitioners alike always strive to anticipate the next big technology or threat to ensure they are prepared to handle whatever may come their way,” chides Breen.

Breen argues that GenAI hit the technology scene this past year with a bang and is already heavily being embraced — or companies are racing to get involved so they don’t fall behind. But among all its popularity, early adopters) are simultaneously seeing a significant amount of FUD - fear, uncertainty, and doubt - and misunderstanding.

“People still don’t fully understand the risks and vision of AI, which lends itself to paranoia or unfounded fears of massive AI security risks. In the year ahead we’ll hopefully see the hype around AI die down and become more of the norm so that we can focus on the many benefits of using these tools to do work more efficiently and effectively. A handful of organizations are dedicating ample time and resources to the real use cases of this technology, and we can expect more businesses to follow suit,” Breen continues.

We already began to see this towards the end of 2023, but in 2024, we can expect governments and AI service providers to continue to implement policies regulating the development of AI. The key differentiator will be if these entities have moved beyond the shock and awe of AI to focus on the benefits. Risk assessment will continue to be a part of the equation as it should with any advancement in technology, but prioritizing innovation in these policies rather than fear will set countries apart. In 2023, we focused on the potential risks of AI. In 2024, it will be essential to focus on the potential opportunities,” concludes Breen.

Ransomware Remains in the Headlines

According to Daniel Howley, the technology editor at Yahoo Finance, after a slight downturn in 2022, cyber-attacks became more frequent last year. A new report by MIT professor Stuart Madnick says there were more ransomware attacks reported in the first nine months of 2023 than all of 2022. The Apple-funded report, but written independently by Madnick, highlights an alarming increase in cyberattacks that impacted as many as 360 million people through August. Madnick claims that ransomware groups are becoming more organized, operating as gangs, and targeting organizations with critical user data such as government and healthcare facilities.

These findings are no surprise to Dr. Darren Williams, the CEO and Founder at BlackFog, who says that after a record-breaking 2023, ransomware will not ease anytime soon and that ransomware is becoming the main threat to all organizations, and insurance is no longer a viable option. He warns that action needs to be taken now and predicts several new trends to take hold.

I covered ServiceNow (NYSE:NOW) last January, concluding that the stock should reach $150B market cap over the next handful of years. Less than one year later, the stock is just about there.

This is yet another case study of the irrationality of the market herd. In July of 2022, sentiment on ServiceNow was extremely negative, as CEO Bill McDermott expressed concern in "macro crosswinds" and "elongated sales cycles". What has ServiceNow done since? In April of this year, it slightly reduced its long term guidance from $16B+ in revenue by 2026 to $15B+. The long term revenue trajectory should be the most important input for investors assessing the business' value. This should have been a negative revelation, yet the stock has soared as ServiceNow has outperformed near term expectations, raising current year guidance throughout the year.

ServiceNow is an easy business to get excited about. ServiceNow's early leaders determined the platform was far more useful beyond being a traditional IT help desk. ServiceNow is an entire workflow solution, meaning it can transfer information from one party to another in a variety of applications. In addition to IT service management, this includes managing IT operations and assets, employee requests, and customer requests. ServiceNow seems to perpetually discover new avenues where its platform can be useful, which gives investors more confidence in our year growth and performance.

ServiceNow has blasted past the organic revenue growth trajectories of behemoths like Salesforce (CRM), Adobe (ADBE), and Oracle (ORCL) by continuing to penetrate the world's best enterprise and government customers. ServiceNow had its best quarter ever for new government deals:

From an industry perspective, this was the best US Federal quarter in ServiceNow's history. NNACV was up over 75% year-over-year. US Federal agencies are standardizing on a single platform with a core set of end-to-end solutions. We had 19 federal deals over 1 million, including three deals over 10 million.

Our top deal in the quarter, the United States Air Force was the third largest deal in the company's history.

It's easy to be suspicious of CEOs like Bill McDermott that talk a big game, McDermott has repeatedly testified that his dream of making ServiceNow the defining enterprise software company of this century, but thus far, execution has been about as good as it gets.

McDermott has continually expressed customer centricity as the reason for ServiceNow's success. McDermott shared a colorful antidote at a recent investor conference of an experience running a retail business as a teenager:

I had built a video game room on the side of the delicatessen and I let the kids in 40 at a time. And to really amplify the importance of treating your customer well at the end of a long day, one of the young people said to me, Bill, when we want to have good food, be treated with respect and play video games, we come to your store and when we want to steal stuff, we go to 7-Eleven. It’s all about the customer, man.

The numbers back up McDermott's claims. As an example, in this chart shared at Investor Day each year, ServiceNow's customer cohort from 2010 is spending over 25x this year than they spent their first year as a customer:

It's hard not to like ServiceNow's fundamentals, it's even harder not to like its charismatic CEO. Sentiment ebbs and flows, the principles of valuation do not.

Valuation:

ServiceNow (along with the broader market) is just beginning to crest to new highs following the November 2021 peak and subsequent rate-driven sell-off.

As software valuations compressed in 2022, the debate over whether or not to classify stock-based compensation as an expense raged. It's become clearer that it should indeed be expensed, even if not a cash outflow. Here's why:

During the years ended December 31, 2022 and 2021, we issued a total of 2.7 million shares and 3.2 million shares, respectively, from stock option exercises, vesting of RSUs, net of employee payroll taxes and purchases from ESPP.

If we average out ServiceNow's stock price at the end of each quarter in 2022, we reach a price of about $592/share. Multiply this by 2.7 million shares issued, and this equals nearly $1.6B, or just slightly above the $1.4B stock-based compensation expense added back to free cash flow.

This is real value that has been transferred from shareholders to employees. In previous assessments, I may have been a bit too generous, valuing the business. This seemed to matter when valuations were falling, but investors have decided to turn a blind eye as prices have risen again.

ServiceNow trades at a steep multiple of 54x this year's FCF, 91x if excluding stock-based compensation. This compares to 80x and 216x at the peak of 2021, respectively. This is fuel for the bulls, the argument that multiples have significantly compressed at the same valuation because of significant growth.

Sticking To Principles:

It's easy to get drawn into ServiceNow's spectacular narrative and want to own the stock. But when the sky starts falling, as it periodically does in the financial markets, the sole source of conviction becomes very simple math.

The bulk of ServiceNow's value is locked up in distant future earnings. The fundamentals and management team are elite, but the possibility of a long period of underperformance after a huge rally is notable. New investors should consider waiting for a better entry point. It's very difficult to rate such a high quality businesses as a sell, but the valuation is stretched enough the investors should begin to consider the limits on their own risk tolerances if multiples continue to expand.

By Dean Seal

Cognizant has agreed to acquire Thirdera, the largest independent global pure-play ServiceNow consultancy, as part of the growth strategy for its strategic partnership with ServiceNow.

Professional-services-company Cognizant said Wednesday that the addition of Thirdera, which specializes in solutions related to the ServiceNow platform, would add 940 employees to Cognizant's ServiceNow Business Group.