Oracle ( ORCL) faces an unusual problem when it releases earnings later Thursday: Too much optimism, and it risks sparking a rally in the stock of a company it is trying to acquire.

It shouldn't be too tall an order.

"This looks to be the most underwhelming Oracle fourth-quarter in memory," said Cheng Lim, who follows Oracle for Fulcrum Global Partners. (Fulcrum does not do investment banking.)

Lim and many other analysts are focused on Oracle's hostile $5.1 billion bid to buy PeopleSoft ( PSFT), which is itself attempting a friendly takeover of rival software maker J.D. Edwards ( JDEC). (PeopleSoft said Thursday its board voted unanimously to recommend that stockholders reject Oracle's takeover bid. Oracle responded expressing disappointment in the action.)

Lim is a little less positive about the quarter than the Wall Street consensus, but both expect year-over-year revenue to decline a bit, while earnings increase modestly.

Analysts polled by Thomson First Call expect the company to earn 14 cents for the quarter ended May 31, compared to 12 cents a year ago, and they expect total revenue of $2.75 billion, down from $2.77 billion last year.

Among the key indicators: new license revenue from databases and applications as well as deferred revenue, all of which give an indication of how much new business the company is generating.

Core Snore

Oracle's core database business is not growing. In the fourth quarter of 2002, admittedly a stronger-than-usual segment, new database licenses totaled $1.15 billion. Eric Upin of Wells Fargo Securities expects a decline of about 5% to $859 million this year, and Lim estimates a drop to $795 million. More telling, perhaps, was the third-quarter year-over-year decline from $629 million to $602 million, a drop of 4.1%. Wells Fargo does not have a banking relationship with Oracle.

Oracle's application business has been disappointing, and that, of course, is one big reason the company is pursing PeopleSoft, whose applications in human resources and other areas sell well. A year ago, Oracle's new-application license revenue was $245.7 million. Upin expects a drop of 6% to $231 million.

Nevertheless, Upin is rather bullish on the stock, raising his rating on Wednesday from hold to buy, with an 18-month price target of $18. Oracle closed at $13.27 Wednesday.

"After many years and attempts, we believe Oracle finally has effectively expanded its product story from largely a database and technology tools company to a highly integrated software solutions company, spanning the entire range of the software stack," Upin wrote in a note to clients.

Still, analysts are looking forward to the next few quarters, when the question of Oracle's PeopleSoft bid might be resolved. Compared to that industry-shaking question, the May quarter seems almost like an afterthought.

In fact, Lim believes that Oracle will keep guidance and discussion of macroeconomic trends as low key as possible. Why? The last thing Oracle needs right now is for the enterprise software sector to appreciate, making its $16-a-share-bid for PeopleSoft look even cheaper than it already does. (PeopleSoft closed at $17.62 Wednesday.)

Upin is positive about the deal, saying it will be accretive from the start, but believes Oracle will have to up its bid to the high teens to succeed. Even then, he wrote, he'd still be positive on the deal. Credit raters have expressed some concerns about it, however.

Similarly, Trip Chowdhry of Midwest Research is bullish about the deal, saying in a note: "ORCL is struggling to gain market traction in enterprise applications because of its inferior offering and poor customer support. The only way out of these challenges is to acquire a company that has a superior product and knows how to effectively deal with business users (PeopleSoft)."

Chowdhry, who also thinks Oracle will have to raise its bid, said he expects "the combined company to lay off about 10,000 redundant employees, resulting in cost savings of over $1 billion annually." (Midwest Research does not have an investment banking business.)