IAC's make-or-breakup earnings report

(Fortune) -- Barry Diller will be in a rare win-win situation Wednesday morning.

If the company he helms, IAC/Interactive Corp, posts a good earnings for the first quarter, the CEO can begin the process of mending his bruised reputation as a deft leader. If the results are lackluster, they may lend additional support for Diller's proposal to break IAC into five parts.

A consensus of Wall Street analysts expects that IAC (IACI, Fortune 500) generated $1.53 billion in revenue during the first quarter of 2008, or $.30 in adjusted earnings per share. IAC shares rose two-tenths of a percent to $20.46 on Tuesday.

Wednesday's earnings offer the first look at IAC's numbers since a courtroom battle between Diller and major investor John Malone put Diller's leadership under intense public scrutiny. In March, the two men battled in a Delaware court over Diller's proposal to break up IAC into five separate companies.

IAC's holdings include Ask.com, Match.com, Ticketmaster, and the Home Shopping Network (HSN). Malone asserted that Diller's plan was an attempt to wrest control of IAC from Malone's Liberty Media, because the scheme would have diminished by half Malone's 61 percent majority voting rights in the new spinoffs.

Malone's lawyers made the trial referendum of sorts on Diller's leadership of the company. Unlike his success in the movie and television business, Diller's IAC had some early successes, but over the last five years, shares have fallen 59 percent. Diller insists he sketched out the spinoff plan to unlock growth.

Malone wanted to oust Diller, claiming Diller's breakup proposal was a breach of his duty to shareholders. Judge Stephen Lamb decided in favor of Diller, however. The judge declined to rule on the spinoff plan itself because it has yet to be put into action.

IAC's board has voted to support the spinoff in principle, but has yet to determine how they will allocate shareholder voting rights, debt, or assets among the new companies. Diller's plan would result in five separate companies: HSN, Interval International (a vacation timeshare exchange), LendingTree, Ticketmaster and IAC, which would include the Ask.com and Match.com holdings.

IAC's board is expected to meet this week to begin ironing out the specifics of the breakup scheme. They are not expected to reach a conclusion on how to proceed anytime soon, something that is likely to be a drag on the stock, say analysts. Even so, says Bernstein Research analyst Jeffrey Lindsay, "a poor earnings result would lend weight to the notion that the breakup needs to happen as soon as possible because certain parts of the company are holding others back."

Indeed, IAC's prospects in an economic downturn aren't looking bright. Many of its businesses are challenged. In 2007, the conglomerate grew revenue by 8 percent, to $6.4 billion. Analysts believe that to be a poor performance, considering that Internet advertising is growing at 22 percent a year and e-commerce is growing at around 19 percent each year.

Diller and Malone revealed during the March trial that they have been talking all along to hash out an agreement that might, say, spin the companies off and compensate Malone for his reduction in voting rights.

But IAC faces other challenges as well, Citigroup analyst Mark Mahaney wrote in an April 27 note to investors. "We believe ownership conflicts are likely to resurface, and uncertainty is an overhang," wrote Mahaney, who maintains a "hold" rating on IAC shares.

He also noted that unlike many of IAC's e-commerce peers, international sales are only 11 percent of total revenue. Google (GOOG, Fortune 500), eBay (EBAY, Fortune 500), and Amazon.com (AMZN, Fortune 500) all generate close to half of their revenues overseas, where they gain from higher growth prospects, lower tax rates, and currency exchange benefits.

Wednesday's earnings release will offer an indication as to whether IAC brands like Ask.com and Match.com are maintaining some revenue growth, as analysts speculate they have been in the first quarter of 2008, even in the midst of consumer penny-pinching. HSN is expected to post earnings improvements over 2007, as a result of a restructuring that included operational improvements and greater use of the network's website as a conduit for sales.

On the other hand, IAC companies such as Ticketmaster, LendingTree, and Cornerstone Brands are seeing slower sales. IAC was forced to take a $457 million write-down on mortgage broker LendingTree's 2007 loss of more than $500 million. As the credit crunch and housing crisis have only worsened since then, LendingTree's weak performance is expected to continue throughout 2008. Cornerstone, a catalog company that relies heavily on the sale of housewares and home goods, is suffering due to the housing downturn as well.

As it stands, Bernstein Research's Lindsay believes "it is increasingly unlikely that IACI will meet its original spin-out deadline of third quarter 2008 and the implementation could be delayed well into 2009," he noted in a recent report. "It's not clear that any of the players have come to an agreement on how they'll allocate debt, voting rights, and assets," Lindsay wrote. "We're telling new investors to wait until this all becomes more clear."