Oracle (Nasdaq : ORCL)'s earnings report this Thursday might just be what the market needs: evidence that not all technology companies are going to have rough fourth quarters. Despite the rally this past week, a flurry of tech companies including Intel (Nasdaq : INTC), Apple Computer (Nasdaq : AAPL), and Motorola (NYSE : MOT) have announced profit warnings lately. If the rally in tech stocks is to be sustained, sooner or later someone is going to have to step up and demonstrate some solid fundamentals.

There's a good chance Oracle will be able to. In a press conference Monday, founder and CEO Larry Ellison responded to a question about Oracle's earnings report by saying, "I slept fine over the weekend." We hope that means the company will fare better than it did the last time it reported earnings.

Analysts expect the database software giant to report a 10-cents-per-share profit, compared to the 7 cents per share earned during the same period last year. But as anyone who follows this stock closely knows, investors want Oracle to do more than beat its earnings estimates. To satisfy the market completely, Oracle must not only beat Wall Street's expectations, but do so without a blemish. That means reporting better-than-expected sales from its application software business.

Oracle's earnings report last quarter caused its stock to tumble 8 percent, which helped pull down the Nasdaq by 2 percent. Even though the company beat the First Call consensus estimate by 4 cents per share, the stock took a hit because sales of Oracle's application software, including its 11i e-business suite package, increased a lower-than-expected 42 percent. Analysts were projecting 50 percent to 60 percent growth. Oracle's stock has tumbled 28 percent since it reported its latest quarterly earnings in September.

"We are in a world of extremes now," says Mark Murphy, analyst at FAC/Equities. "Investors either love or hate a company. Such knee-jerk reactions are creating much of the volatility in the market."

CAN ORACLE CATCH UP WITH I2 AND SIEBEL?

Now Oracle has to come back with a vengeance -- with strong revenue growth in its application business, which is offering higher growth opportunities than the slowing database market. Since 70 percent of Oracle's total revenue still comes from its database business, analysts are looking for evidence that the company is becoming as big a player in the application business as Mr. Ellison likes to proclaim.

No matter the means, Oracle needs to give some indication that it is producing solid Internet application products and that it is achieving a strong adoption rate. The company must show that it has gained ground on business-to-business software competitors i2 Technologies (Nasdaq : ITWO) and Siebel Systems (Nasdaq : SEBL). Because many customers are unwilling to throw out software already installed on their computers, Oracle, an end-to-end solution provider, is still competing in a best-of-breed world. Indeed, even believers in Oracle's one-stop-shop strategy agree that the company will not see any substantial benefits for some time. These Oracle supporters hope that customers eventually will no longer take the time and money to integrate all the best-of-breed products.

But Wall Street is not typically known for its patience, and analysts have set aggressive targets for Oracle's application business. According to a recent report by CIBC World Markets analyst Melissa Eisenstat, she expects Oracle to report revenue growth this quarter of 15 percent, to $2.7 billion, compared to $2.5 billion in the year-ago period. On the application side, Ms. Eisenstat forecasts revenue growth of 49 percent, to $250 million, up from $168 million a year ago.

Analysts will also be keeping an eye on Oracle's operating margins. The company has trimmed its costs by using its own applications to streamline business processes. While some analysts believe there's little room for more margin improvement through cost cutting, Ms. Eisenstat predicts that Oracle's operating margin will increase to 31 percent, up from 25 percent in the prior year and 29 percent the previous quarter.

ADDRESSING MANAGEMENT CONCERNS

It will be interesting to see if Oracle addresses the issue of executive turnover in its latest report. Two top executives have left the company in the past six months: former executive vice president Gary Bloom left last month to take the CEO job at Veritas Software, an exit which came on the heels of former chief operating officer Ray Lane's departure. Such an exodus of widely respected managers begs the question of whether Mr. Ellison's autocratic leadership style is destabilizing the company. Mr. Ellison has downplayed the impact of these departures, but obviously the proof is in the pudding. Strong numbers this quarter can help prove this theory wrong more than can words from Mr. Ellison.

Oracle is still a pricey stock, trading at 51 times fiscal 2002 earnings estimates. Investors have been willing to pay such a premium in the past because Oracle has lived up to expectations. With the database market maturing, it is imperative for Oracle to prove to Wall Street that it is making inroads in the more sexy Web infrastructure business. This would also go a long way toward proving that not all leading technology companies are in as dire straits as many think.

Mr. Ellison may have slept fine last weekend; we're hoping Oracle exceeds expectations so the market can rest easy this coming weekend.