UPDATE 3-AT&T profit up on strong wireless sales

(Adds results, CFO comments)

By Ritsuko Ando

NEW YORK, Oct 23 (Reuters) - Top U.S. phone company AT&T Inc (T.N) posted a 41.5 percent rise in quarterly net profit on Tuesday, as Apple Inc's (AAPL.O) iPhone helped boost wireless subscriber growth above market expectations.

AT&T, the exclusive U.S. service provider for the iPhone, said its third-quarter net profit was $3.1 billion, compared to $2.2 billion in the year-earlier quarter before it bought BellSouth. Earnings per share fell to 50 cents from 56 cents due to a larger number of shares following the acquisition.

Excluding costs from the deal and other items, profit rose to 71 cents per share from 63 cents. That was in line with Wall Street's average forecast, according to Reuters Estimates.

AT&T's wireless subscriber growth, however, beat analysts' expectations. The company added a net 2 million wireless subscribers in the quarter, taking the total to 65.7 million. That exceeded the average forecast of around 1.5 million net additions from six analysts contacted by Reuters. Estimates ranged from 1.2 million to 1.8 million.

"It was a remarkable quarter for wireless," said Kevin Roe, an analyst at Roe Equity Research who had forecast 1.2 million net additions. "The iPhone materially helped third-quarter results. It absolutely was a draw for subscribers."

AT&T shares were up 1.1 percent, or 44 cents, to $41.61 in afternoon trade on the New York Stock Exchange. Few analysts predicted substantial gains in the shares, saying growth has been priced in.

Christopher King, an analyst at Stifel Nicolaus, said he believes the stock was fully valued at current levels of around 6.6 times his 2008 estimates.

IPHONE EFFECT

Apple said on Monday it shipped 1.12 million iPhone units in the quarter, near the high end of analysts' forecasts.

AT&T Chief Financial Officer Rick Lindner told analysts on a conference call that more than 40 percent of those iPhone buyers were new customers for AT&T.

Wireless revenue in the quarter totaled $10.9 billion, up 14.4 percent from the year-earlier quarter.

Wireless margin rose to 39.1 percent from 35.6 percent, and Lindner forecast it to rise to "a full-year average in the lower 40 percent range" next year, with room for further improvement beyond 2008.

Overall third-quarter revenue nearly doubled, to $30.1 billion from $15.6 billion. But combining sales from the former BellSouth as well as their wireless joint venture, revenue rose 3.2 percent. AT&T closed the acquisition of BellSouth late last year, and Cingular Wireless has been renamed AT&T.

AT&T has gone through a series of mergers in the past several years including SBC Communications Inc.'s acquisition of AT&T Corp. Lindner said the company achieved cost savings of $2.8 billion in the first three quarters as a result of mergers.