Oracle’s Mark Hurd on the cloud, competition, and costs by Adam Lashinsky @FortuneMagazine September 23, 2013, 2:45 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Mark Hurd FORTUNE — Mark Hurd has been co-president of mega-cap technology company Oracle for three years now, having joined shortly after his dramatic exit as CEO of Hewlett-Packard. Hurd’s dramas these days are the more typical business type: Oracle’s coming to grips that it is a giant competing against nimbler upstarts. Oracle faces competition from the likes of Salesforce.com CRM and Workday WDAY as well as more size-appropriate challengers IBM and SAP. (Oracle makes database software and many applications that run with it; Salesforce and Workday are online-only application makers, with the former focused on sales tasks and the latter on human resources. IBM and SAP have software offerings similar to Oracle’s.) The incumbents have been scrambling to match the newbies in “cloud” computing, or software that is offered as an Internet service rather than as programs installed on a customer’s computers. Oracle ORCL is generally perceived to have been slow to respond to the cloud, having instead pursued an aggressive acquisition strategy that included the unlikely 2010 purchase of server maker Sun Microsystems for more than $7 billion. Moving to the cloud is tough all around for big companies — like turning the proverbial aircraft carrier — in part because Internet software generally costs less. That’s great for customers, but tough for salespeople, and Hurd, a sales executive earlier in his career, oversees Oracle’s sales force. In an interview in his Redwood Shores, Calif., office, Hurd spoke with Fortune on the eve of Oracle’s massive Oracle Open World developers’ conference, which promises to snarl traffic throughout San Francisco from Sept. 22 to 26. Hurd addressed the state of Oracle, including the shift to the cloud, why Oracle will beat its competitors, and whether or not Oracle will abandon hardware. Edited for concision and annotated for explanation, a transcript of the conversation follows. What will be the highlights at Oracle Open World? First of all, it’ll be a highlight that we have 60,000 people. It’ll be the biggest IT event that I’m aware of ever in the industry to have that many people in one location. We’ll have a very large partner ecosystem there. So you’ll see Dell DELL , Deloitte, and EMC EMC there. Fujitsu will be there. You’ll see a very large cast of partners that will participate. We have a huge list of customer speakers. I’ll be doing a speech, and I’ll have the CEO of Airbus with me. And the CEO of the New York Stock Exchange too. And products will you be focusing on? We’re going to go talk about the fact that we’re going to now have in-memory options for our database. [This refers to the ability to store database information on memory chips rather than on disc drives, analogous to the why Apple’s iPods shifted years ago from bigger mechanical drives to smaller flash-memory.] We have released a new database called 12C. It is the 12th generation of the Oracle database. The C is for cloud. In-memory will be a big theme. There will be another series of cloud announcements around things like human capital management [think: human resources] and customer experience software [like sales applications]. You’ll also hear us talk about a thing called M6, which is a piece of silicon which is in the Spark [server] product line. And there will be a series of other hardware announcements. Going back to the cloud, what percentage of overall business, expressed either in revenues or profits, is cloud vs. traditional software? We don’t really give out a cloud number. The reason it’s hard to do, is that while we have software as a service offered as a subscription — and we give out that number: It’s in excess of a rate of $1 billion a year — that would not include all the things in the Oracle portfolio that are used in the cloud. [Investors expect Oracle to record revenues this year in the neighborhood of $38 billion.] So that doesn’t include everything we sell to Salesforce.com, which is used for them to run their cloud, for example. But in your example, what you’re selling to Salesforce.com is traditional software. That’s how they’re buying it. What they do with it is their business. I mean, you don’t include auto sales either in your revenue either. No one’s asking you, “What’s your percentage of revenue from selling automobiles?” Yeah, we don’t sell too many automobiles. But we do sell software to people that run clouds. Remember, there’s multiple elements to the cloud. There’s tools. There’s infrastructure. And there’s applications. In addition, there’s not just what you think of as the public cloud. There’s a thing called the private cloud, behind the firewall. And the only reason I’m making these distinctions is that the word “cloud” is a relatively complicated term. It’s an umbrella term. Cloud means a whole set of things. And by that definition of cloud, we sell tons of things that are used as a private cloud. And then we have our own [software-as-a-service] applications that people can use. And we’ve been public about that number. Which is that billion-dollar-plus run rate. Yes. Growing at what kind of rate? We don’t publish that. It’s a good number. How satisfied is Oracle with its cloud offerings? Did you get into it early enough? Are you where you need to be now? Are you concerned with the younger, smaller competitors that grow much more quickly in cloud offerings? Three questions, I guess. Yeah. It sounded like five or six in one thought? [For the record, it was four questions.] I know you’re up to it. I think Oracle did a couple things. When there was no such word as cloud, and there was just software over the Internet, Larry started this company called NetSuite. NetSuite pre-dated Salesforce.com. So Larry had this idea that software over the Internet seemed like a pretty good idea way back at the time. [NetSuite, which focuses on online sales software, is worth about $8 billion today, compared with Salesforce.com’s valuation of more than $30 billion. Larry Ellison, CEO of Oracle, continues to control nearly 44% of NetSuite’s shares.] And so we went about the process of building applications organically through R&D, and simultaneously acquiring pieces that we weren’t building through R&D. For example, we have a sales automation solution that was built organically by Oracle. We have a service automation solution that we bought, a company called RightNow. They are the leader. And by the way, every company we bought was the leader in their space. In human-capital management [usually known as human-resources software] we built a core product. And we bought Taleo, a recruiting app. We did not have a marketing automation solution. So we bought a company called Eloqua that is the leading marketing automation solution in the world. So this is now a combination of a build-and-buy strategy to build a suite of capabilities that’s unmatched in the industry. Nobody has it. How do you communicate this strategy to customers? When you hear “cloud” and you gravitate to a perspective that everything should be cloud. We’ve tried to do something a little bit different architecturally. When the customer says, “I really want this,” we’ve built our solution so they can either use it as an online application from the Oracle cloud, or if they like the IP and don’t want it in the cloud, they can do it behind their firewall. Our message: Instead of worrying about the delivery architecture, worry about the application. Worry about the IP. How happy are you with how well your sales force is selling this strategy? You’re never going to ever say you’re thrilled with everything. But I am happy with the progress of our sales organization. I think we changed them quite a bit a year and a half ago, and I think they’ve made good progress. One analyst I spoke to pointed out that sales force growth is growing faster than license revenue growth. Why? We have invested a reasonable percentage of our sales force growth into this thing called cloud. And when you sell cloud, you sell a subscription. You do not sell a license. [Subscribers to software services typically pay more slowly than license customers — and perhaps less as well.] That doesn’t mean long run that the business models aren’t fine, but you do have this outage of productivity as you build up the subscription revenue base. What was Oracle’s strategy in becoming a hardware maker, and are you 100% stay-the-course satisfied with that strategy today? Well, we’re staying the course, just to take that off the table. Our strategy has been to vertically integrate hardware and software, in that we think hardware and software together, engineered together, provides a better outcome. And we think it provides a better outcome on several planes, and I’ll try to describe what they are. First, we do the work that you, the customer, used to do. So historically in the industry you could buy a server from [one vendor]. You could buy an operating system from [another]. You could buy a database from [a third]. You could buy a middleware from [yet another]. And then you give it to your IT organization, and your IT organization glues all this stuff together. Well, our better idea would be, Why don’t we just glue it all together for you? We’ll test it. We’ll warrant it. And we’ll do that work, and that cost goes into our R&D as opposed to your IT budget. So point one: We do the work, you don’t. Second, this stuff just performs better, meaning that we build hardware to optimize the performance of the software. Third, you get a different support experience. So the fact that we build the stuff together and integrate it together, we now have one version. We have tested all the versions of software together, and we’ve seen all the problems. And we can create a repository, and any time our customer has a problem, we directly hook up and can auto-patch it in nanoseconds. So our strategy has been to sort of change the game with this — and then you see a lot of people trying to frankly, you know, imitate that strategy. You’ve seen it from many of our competitors. Like who? [Unlike his boss, Hurd avoids mentioning competitors by name. It is no secret that IBM and SAP, also big companies with massive on- and offline software offerings, have made hardware acquisitions.] You seem to be focused on large competitors that look like Oracle, while Wall Street is focused on smaller, faster-growing competitors. If an investor wants exposure to big-cap tech, an investor’s going to have to make a decision. You know, do they want exposure to a very, very strong, high-cash-flow company like Oracle with material recurring revenue, with a position to compete with the companies that are small, that you described? By the way, I think that sounds like a pretty cool profile. Or do you want some other big cap company that’s got negative growth and, you know, frankly is in the position that it’s in. You as an investor will have to make that decision. Now, I think that’s a little different than us operationally in the sense that, yeah, we are competing to a degree with those companies, albeit perhaps very North America-centric and in a single process, the way you described HR or sales automation. And I think that’s good for the investor. That’s good for the investor that we’re going to go out and whip their butt. And at the same time, you’ve got this high recurring revenue cash flow machine behind it.