NEW YORK (CNN/Money) - Oracle Corp. is expected to show a decline in earnings when it reports its fiscal first-quarter results Tuesday, but observers will be paying closer attention to what executives of the world's No. 2 independent software supplier have to say about their prospects for the coming months.

"That's what everyone is wondering," said Bob Austrian, an analyst at Banc of America Securities. "In this environment they're probably not going to aim too high, leave well enough alone and have a modest target."

As have most information technology (IT) providers, Oracle's sales have been slumping in recent quarters as large U.S. corporations continue to defer spending amid a sluggish and uncertain economy.

For the most part, Wall Street analysts are expecting Oracle to report a net profit of 7 cents per share, down from 9 cents per share a year ago, according to a survey conducted by earnings research firm First Call.

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Revenue generally is expected to come in at about $2.06 billion, down from $2.31 billion, according to the First Call survey.

The company's earnings report is due out after the close of trading Tuesday.

Three months ago, Oracle executives said first-quarter software license revenue, viewed by analysts as a key measure of the health of Oracle's business, could be down 15 percent-to-25 percent from the same period last year

For the fiscal second quarter ending in November, estimates currently are for a profit of 9 cents per share on revenue $2.31 billion, down from 10 cents per share on $2.36 billion in revenue during the year-ago quarter.

For the past six quarters, Oracle (ORCL: Research, Estimates) has logged year-over-year revenue declines as it struggled with slack demand in its core market and a difficult transition into a relatively new product area for the Redwood Shores, Calif.-based company.

Profits began showing annual declines three quarters ago. The company has been able to stem the losses there largely through aggressive cost-cutting.

Much of the cost-cutting has come in the form of layoffs and other workforce actions.

Merrill Lynch analyst Christopher Shilakes estimates that Oracle slashed its company-wide head count by 600-to-700 during the first quarter. The company ended its last fiscal year with 42,006 employees, down from 42,927 the previous year.

Additionally, the company has been shifting its work force to areas where the cost of labor is lower, such as China and India.

Historically, Oracle has been best known for its database software. More recently, the company has extended its reach into related business applications as part of a long-term strategy to reduce its exposure to the maturing database market.

It faces significant challenges in each of those product areas.

On the database front, where Oracle has long been the market leader, rivals IBM (IBM: Research, Estimates) and Microsoft (MSFT: Research, Estimates) have been posing an increasingly competitive threat, with IBM recently edging past Oracle in global database revenue, according to a report by high-tech research firm Gartner Dataquest.

Executives of Oracle harshly criticized the Dataquest report, stressing that they are not losing market share when measured by the number of users. They also have disputed IBM's numbers, which included revenue from Informix, a database vendor IBM recently purchased.

Oracle has been especially hard hit by the recent economic weakness relative to its peers in the database software, according to Gartner Dataquest analyst Colleen Graham. In the late 1990s, the company's sales were boosted in large part by customers upgrading their systems to deal with the so-called "Y2K problem," as well as the scores of startups that materialized during the dot.com craze.

"That client base is gone now," she said.

And as the company continues to compete with IBM and Microsoft for database customers, it will be doing so in a market that will be marked by lackluster growth at best. By Gartner Dataquest's estimate, database software sales this year are expected to be flat with 2001 and show growth only in the low single digits throughout 2006.

Meanwhile, its business applications business continues to struggle, hurt by the continued IT spending drought, intense competition from companies such as Siebel Systems (SEBL: Research, Estimates), BEA Systems (BEAS: Research, Estimates) and SAP (SAP: Research, Estimates), and an initial release of its all-in-one "e-business suite," called 11i, that was marked by a series of technical snags.

Banc of America's Austrian believes Oracle has worked through its problems in the applications area and expects an improved performance from that line of business, which currently represents about one quarter of the company's total revenue.

"Oracle's applications strategy has been spot on, but the execution has been a big problem until recently," Austrian said. "Quality has plagued them as the show-stopper issue. I believe that's now been addressed, so Oracle should now deliver better applications results than its peer group."

For the most part, Wall Street is expecting Oracle's earnings to be in line with or better than its target for the first quarter, which many have suggested executives set intentionally below a level they thought was achievable. There remain some concerns about its revenue for the quarter amid continued weakness in demand for its products.

Austrian is expecting Oracle to top Wall Street's consensus earnings estimate when it reports the first-quarter results, due in large part to the ongoing cost-cuts and improvements in execution. He also said he is "a little more optimistic" than most of his counterparts when it comes to revenue.

"I think they have a chance to do better in software than some had expected, but not by much in this environment," he said.

Several other Wall Street analysts also expect Oracle to either meet or exceed its profit targets, but at the same time were somewhat cautious about revenue.

Merrill's Shilakes said he expects Oracle's profit margins for the first quarter are likely to be stronger than expected, based on its continued cost cuts, but suggested that revenue could show some weakness, particularly in Europe.

Thomas Weisel Partners analyst Robert Schwartz also pointed to Europe as a potential soft spot. "While we believe market conditions in the U.S. have not deteriorated markedly over the past quarter, our channel checks indicate that Europe and the [Asia-Pacific] regions continue to weaken," Schwartz told clients in a research note Monday.

Jim Mendelson of Soundview Technology told his clients that his firm's checks on Oracle's business taken after the quarter closed have generally been positive. He noted, however, that the relatively strong quarter "is more a function of improving execution than a positive change in demand, though we believe demand is stabilizing."

He also raised a red flag on Oracle's non-U.S. sales, but said exchange rates are likely to offset the negative impact. "International remains a question, but we believe a weaker dollar limits the risk that dollar-based revenues will be disappointing," Mendelson said.

Shares of Oracle, which have fallen more than 47 percent from a 12-month high of $17.50, were trading sharply lower on Nasdaq late Monday afternoon.