Oracle CEO Mark Hurd explains his plan to double application revenues and bring forth new life on the cloud (ORCL)

Mark Hurd Oracle

Oracle co-CEO Mark Hurd has come out swinging after the company missed quarterly cloud revenue projections and faced questions about the exit of the company's top exec in charge of cloud.
In an interview with Business Insider, Hurd explained how he's betting on big growth in the company's applications business.
Oracle could double its application revenue from $11 billion to more than $20 billion if all it did was migrate existing customers from its on-premise software to its Software-as-a-Service cloud applications, Hurd said.

Oracle may be known for its databases, but co-CEO Mark Hurd has his eye on doubling the tech giant's applications business.

Applications were an $11 billion business for Oracle in fiscal 2018 but he sees it as an over $20 billion opportunity for the company, he said. Oracle's massive catalog of cloud and on premise software offerings includes accounting software, HR software, marketing software, supplier management software and so on.

And it can become a big organic growth engine for the company, he said.

Oracle wants to get its entire userbase to abandon on premise software and start using cloud applications. This move will protect Oracle from losing its customers to cloud rivals like Workday or Salesforce and, at the same time, allow Oracle to earn more money from each customer, he believes.

By his calculations, simply moving existing customers to the cloud will grow Oracle's application revenue from $11 billion to more than $20 billion, he said.

"If we did nothing but move our historical userbase of applications, we will double our applications revenue," Hurd said. But he also said that Oracle isn't just moving its current roster. It is also adding new customers. He estimates that the current growth in SaaS is half existing customers, and half new customers.

While applications made up just 27% of Oracle's overall revenue in fiscal 2018, it's a growing segment for Oracle and one that Hurd believes could supercharge other areas of the business once it gains more momentum.

This strategy also allowed him to shrug off the company's ever-shrinking hardware business, down another 4% in its last quarter from the year-earlier period.

"You don't need servers, you don't need data centers, you don't need anything if it's not there to support applications," Hurd said. "So there is a further benefit business strategy wise to Oracle leading the applications business, in that it hooks into almost everything else our customers do in IT as the result of what applications they've got."

Application revenues are growing, while other areas suffer

Quarter after quarter, Oracle's greatest critics on Wall Street echo similar sentiments: the company isn't growing fast enough. Some have even suggested that management isn't up to the task.

When asked about such criticism, Hurd said to look at the numbers. "Don't take my opinion," he said. "There's a whole set of numbers and facts that I think are irrefutable."

Indeed, application revenues grew 11% year-over-year in fiscal 2018, up from 6% growth in fiscal 2017. It's a booming area, especially as Oracle faces quarter-after-quarter declines in its hardware and licensing businesses.

When it comes to enterprise resource planning, one of Oracle's most successful application products, those numbers look promising. Its cloud ERP sales grew more than 30% in the first quarter of fiscal 2019. The company claims to have 30 times the number of ERP customers as Workday, a key cloud competitor. Although, to be fair, Workday is still more known for its cloud HR software than for its cloud accounting software known as ERP.

And in the last year, a number of large customers including Bank of America, the LA Lakers, Office Depot and Western Digital moved onto Oracle's ERP cloud from a competing ERP system, according to the company.

Wall Street has one key issue when measuring progress

But for many analysts, there is a key set of numbers missing. In Q4 2018, which ended in May, Oracle stopped reporting out specific cloud revenues by blending cloud applications in with traditional software and blending cloud storage into traditional platform/infrastructure revenues.

In other words, for all the chest pounding about cloud growth, Oracle has made the unusual move from showing it off to hiding it from view.

And that means, it's more difficult for analysts to trace how well Oracle is executing on its plans to move existing customers to its cloud, based on its quarterly results.

When asked about this reporting change, Hurd said bundled numbers are a more accurate way to understand Oracle's business strategy.

"We didn't try to change reporting just to change reporting," he said, mentioning that some of its products, such as "Bring Your Own License" on the technology side, make it difficult to report cloud numbers accurately. "The responsibility we have is to make sure we're reporting numbers that accurately reflect what we're trying to get done in the market."

For anyone trying to follow Oracle's application strategy, Hurd suggested tracking three numbers: the licenses Oracle sells, which he describes as a "diminishing part" of the business; its SaaS revenue; and its support revenue.

"Those three numbers add up to the total of our applications business," Hurd said.

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