A Dozen Questions for Oracle President Mark Hurd
Earlier this month, the company surprised analysts by reporting quarterly results that were better than anyone expected, and with the revelation that Oracle is now the second-largest provider of software-as-a-service after Salesforce.com, it has challenged the conventional wisdom that it was more of an old-school software company.
But that’s not the most interesting thing I noticed in looking over Oracle’s most recent financials. I saw that a lot of operating expenses were lower — $174 million lower, to be exact — in Oracle’s fiscal 2012 versus fiscal 2011. It looked to me like the Mark Hurd playbook is alive and well. It was the first thing that came to mind when I sat down with the Oracle president (and former CEO of both Hewlett-Packard and NCR) at Oracle’s offices in New York for his second on-the-record interview (here’s the first) with AllThingsD. A transcript of our conversation is below:
AllThingsD: Mark, Oracle had a pretty good quarter, when people expected it to be tougher. Software sales are up, hardware is down. But when I went back and looked at the results, I saw something that looked familiar: Shrinking expense lines in things like marketing and general and administrative. I thought that looked a bit like the old Mark Hurd playbook from HP, and NCR before that. Is that part of what’s going on?
Mark Hurd: I think it was a good quarter for us. The quarter behaved well across virtually every metric. Our pipelines were up. Our conversion rates, which is our ability to convert pipeline into orders, was strong. I think, to your point, we managed our expenses. I think, in the context, if you look at the quarter, we added 3,300 people to our sales organization. And those are really the quota-carrying people, plus the technical people who support the sales people. And we did that while keeping our sales and marketing expenses relatively flat year over year. I think anytime you can realign your capital so you can get it into R&D, or into sales, as we have, it tends to show up. We’ve got more opportunities than we can deal with right now, so we had to increase, and it’s a great thing for us.
And that increase is taking place at a time when some people expected you to cut back. Are you trimming in some places and adding in others?
We’re doing exactly what you’d expect us to do. We’re looking at everything in the company, and trying to ensure that we have our investments in the right place. It’s a team sport. We’ve done a lot of work across Oracle to be prudent in some areas with expenses. But at the same time, we’re investing. Our investment in Research and Development is up. As as you’ve seen, our investment in sales and technical people is up. We’re investing into the business because we think we’ve got a great hand and we want to go play it.
Are you investing in Europe, too? Everyone is concerned about their exposure there, given all the sovereign debt problems and the economic troubles there.
We invested during the year across all the geographies. We grew our U.S. sales organization. We grew our European sales organization. We grew in Latin America, and we grew in Asia. And we grew across most pillars of our business. We made material investments in our applications business, and our cloud applications business. We made investments in middleware — we think we have a very strong suite of middleware, and we want to increase our sales force there. We made investments in business intelligence. We think we have a strong offering with Exalytics, and we want to boost our efforts there. And we’ve made investments in engineered systems, and they’re showing up. If you look at the quarter, we booked almost as many systems in Q4 of 2012 as we did in all of 2011. So I think that’s a compliment to both the product and the capacity of the sales force.
Let’s talk about your engineered systems business, because I think that’s the newest piece that people are just beginning to understand. These are the Exadata, Exalogic and Exalytics systems you’ve been talking about. You’ve got the legacy Sun hardware business on one hand, but what’s fundamentally different about the engineered systems versus the traditional systems?
When you look at Sun, it’s a server line that has the SPARC chip and the Solaris operating system, and it has a very long history. So there’s a couple things we’ve done. Exadata is really a little different than a traditional Sun server. It’s a combination of five different technologies. It has a lot of DRAM memory in it. It has a lot of flash memory in it. It’s got incredible compression technology. We can take a database and shrink it and make it one-tenth the size that it was before. We network it with Infiniband, which gives us 10 times better performance inside it. When you shrink the database by a factor of 10, and run the data inside the computer 10 times faster, you’re doing what you did before 100 times faster. A report that used to take 100 minutes to generate now takes one. And, by the way, you can turn that into a cost benefit or a performance benefit. By that I mean, if you’re happy with 100 minutes, you need only one-tenth of the computer. Or you can run 100 reports in the time it used to take you to run one. It also really combines a server, storage and a database. It’s all of those things, and that’s why we call it an engineered system. And just as important as all of that is the fact that we put it together for you, we provision it for you. Our engineers take the Exadata and integrate everything, which normally you’d have your own people do.
And then you have specific flavors of these systems that are designed for specific industries, say retail or finance or health care?
Depending on how far up the stack goes. Think of Exadata up through the database layer. Exalogic goes up through the middleware layer. Exalytics takes the foundation of Oracle’s business intelligence suite. So they’re three different engineered systems that are built around different parts of the Oracle software stack.
So where does that leave the traditional Sun hardware business?
I think when you speak of Sun, you think of the T Series computer line and the M Series computer line. Larry [CEO Larry Ellison] has done a lot of investments in that core line. So in the traditional server line we’ve done new SPARC silicon, the T4, we’ve brought out a new version of the Solaris operating system, all in an effort to drive better performance and total cost of ownership. And we think now, as we push new releases of SPARC, we think we’re going to have the highest-performing silicon in the computer industry. No one argues that Solaris is the most advanced operating system of the Unixes that are available today. Now we’ve also done something new. We’ve introduced a SPARC Supercluster, and that’s all those different pieces in Exadata, built on a SPARC chip and running Solaris. So if you’re an older Sun-SPARC customer and want the benefit you get from Exadata, but you don’t want to switch over to Intel and Linux, which is what Exadata is built on, you can get them and keep SPARC and Solaris. We’re investing into the Sun base.
That brings me to another interesting point. Without diving too deep into the circumstances around the departure of Keith Block, he got caught in court documents saying some things about Sun products; and earlier, there were some statements made by Larry about letting the business around some older commodity products — Sun products, products where the profit margin is lower — shrink. Obviously you’re not going to defend what Block said, but at the same time, you’ve got Larry saying that it’s okay with him if the sales of certain hardware products fall to zero. Putting myself in the shoes of a longtime Sun customer, I wonder if you can unpack those two ends of a spectrum for me?
The best thing to do is tell you what we’re doing. We’re interested in selling intellectual property that differentiates Oracle in helping our customers run their IT better. That’s what we’re focused on. Those things manifest themselves in the T4 chip and Solaris 11 and SPARC Supercluster, and Exadata and Exalogic, and so on. A product that we bring to the customer that merely passes through our distribution channels and passes through our books, we don’t think we add a lot of value to that. We continue to do it mainly, though with less emphasis, because the customer has asked us to do it. Our view is that Oracle adds value where we can bring to bear differentiated intellectual property that gives people a better, more advanced solution that helps them do something cool and exciting.
Let’s talk about the cloud. Larry said Oracle is on track to be the No. 2 software-as-a-service (SaaS) provider after Salesforce.com, after all those acquisitions you’ve made. Oracle has always been kind of a traditional on-premise software player. How do you see the cloud strategy shaping up?
Let me first say this: You have to separate “cloud” from SaaS. First, there’s an incredible amount of Oracle technology running in the cloud: Oracle databases, Oracle middleware, Exadata, Exalogic. … So if you asked us to give us to give you cloud revenue, it would be huge. But that’s separate from SaaS. Just to be clear: We are No. 2 today in SaaS; we have roughly a billion dollars in SaaS revenue. And we’re just getting started. Our stuff is only just now hitting the market. We will have most of our Oracle portfolio running as SaaS on the Oracle cloud by the end of the calendar year. And when you look at our cloud, it’s best on our technology, running our apps. And by the way, that other SaaS company you mentioned — I can’t remember their name — their stuff is built on Oracle. And it was built three decades ago, in the ’90s. Our stuff is fresh, it’s new and modern and built on Fusion middleware.
We’ve said we’ve got a balanced capital allocation strategy. We’ve been big buyers of our stock. We’re increasing our dividend. And we’re continuing to look at deals that make sense. Larry has said that sometimes the best growth in Oracle’s history has been during economic downturns. And it’s because so many properties become available.
Did you kick tires on Quest Software?
I can’t comment on M&A matters.
When I talked to Meg Whitman at HP earlier this month, she talked about her desire to have a better relationship with Oracle, and how HP and Oracle crafted one of the “great partnerships in IT industry history.” It sounded a little like an olive branch to me. You’re unique in that you sat on both ends of that partnership at various times. Do you share her sentiment?
I can’t comment on that.
You’re coming up on two years at Oracle. Tell me a little about the division of labor. You work with Larry and CFO Safra Catz. How does it work?
It’s just like Larry said at D: All Things Digital. [See the full video here.] He does a lot on products, as he said. I run the revenue, and Safra runs most of our operations. And then, to be blunt, the three of us come together on the strategic issues, and we talk about the issues that cross the areas.