AT&T profit rises on wireless, iPhone disappoints

NEW YORK (Reuters) - AT&T Inc. (T.N) on Tuesday posted a higher-than-expected quarterly profit on strong wireless subscriber growth, but failed to excite investors as the first two days of iPhone sales fell short of forecasts.

AT&T, the sole U.S. service provider for Apple's first phone, said it activated 146,000 iPhone subscribers in the first two days after launch on June 29.

"They likely sold many more phones than they activated," said Cross Research analyst Shannon Cross. "That being said, the Street was probably around 250,000, so it's maybe a bit light."

AT&T shares were mostly flat in afternoon trade, but shares of Apple Inc. (AAPL.O), which makes the eagerly anticipated device, were down about 2 percent.

AT&T, the top U.S. telecommunications service provider, said second-quarter net profit rose 61 percent to $2.9 billion, or 47 cents a share, from $1.8 billion, or 46 cents a share, a year earlier.

On an adjusted basis, which excludes costs and accounting effects from acquisitions, profit rose to 70 cents per share from 58 cents per share. That beat the average analysts' forecast of 67 cents, according to Reuters Estimates.

Revenue rose to $29.5 billion from $15.8 billion. It bought BellSouth Corp. late last year, consolidating ownership of their Cingular Wireless venture.

Adjusted revenue, which combines sales from AT&T, BellSouth and Cingular Wireless in both periods, rose 2 percent to $29.8 billion, in line with market expectations.

But investors focused on the iPhone data.

Pacific Crest analyst Andy Hargreaves said he had expected 400,000 iPhone sales for the first two days on the market, but added that sales figures for coming months would be more telling.

"The difference (between sales and activations) is going to be what was sold on eBay or activations that didn't happen immediately," Hargreaves said. "There were some problems with activations, but from what we heard it was minimal."

AT&T, which has sought to win over subscribers with the phone that also plays music and videos and surfs the Web, said that more than 40 percent of activated iPhone accounts came from new customers.

WIRELESS GROWTH

Soleil Sur Terre Research analyst Todd Rethemeier said the market might have expected too much from the iPhone, which was only on sale for two days in the quarter.

"The wireless numbers overall were decent," he said.

The company's wireless unit -- which has scrapped the Cingular Wireless name for the AT&T brand -- added 1.5 million subscribers in the quarter, bringing the total to 63.7 million. That exceeded the average forecast of 1.25 million additions from six analysts polled by Reuters.

But some analysts, including Stifel Nicolaus analyst Christopher King, noted that wireless margins had fallen to 32 percent from about 33.4 percent in the first quarter.

"It is coming at a cost," he said of subscriber gains.

AT&T said its wireless margin was hurt by costs related to preparations for the iPhone launch and by a rise in handset costs as it increased subsidies to attract higher-value postpaid customers, who pay monthly bills.

Chief Financial Officer Rick Lindner said the fall was temporary, and AT&T's push to sell advanced handsets would lead to more revenue in the long term.

"In the long term we will generate more value off those post-paid subscribers in higher-end devices, to give us much more opportunity to generate data revenues going forward," he said.

AT&T has focused on wireless and Internet services as key growth areas, to make up for a decline in traditional phone service subscribers.

AT&T said it had 13.3 million consumer and business high-speed Internet connections, up 20 percent from a year earlier.

It said 35 percent of its consumer lines had the company's broadband service, up from 27.8 percent a year earlier.

The company also said its Internet-based video service called U-verse showed strong growth in the quarter, ending with 51,000 video subscribers, up from 13,000 three months earlier. U-Verse costs were in line with previous estimates, it added.

AT&T said it expects to continue to operate at the top end of its previously provided outlook for a 2007 operating income margin range of 23 percent to 24 percent.

The company's shares rose 22 cents, or 0.6 percent to $40.25 on the New York Stock Exchange after falling as low as $39.20. Apple was down $3.48, or 2.4 percent, at $140.22 on Nasdaq after falling as low as $136.55.

(Additional reporting by Franklin Paul and Sinead Carew)