AT&T 3Q profit up 5.5 pct, misses Street estimates

Wednesday, October 22, 2008

By PETER SVENSSON, AP Technology Writer



AT&T Inc.'s earnings rose 5.5 percent in the third quarter, but missed analyst expectations because of strong sales of iPhones, which the carrier subsidizes.

The country's largest telecommunications company said Wednesday it earned $3.23 billion, or 55 cents per share, in the July-September period, up from $3.06 billion, or 50 cents per share, in the same quarter a year ago.

Excluding $1.1 billion in merger-related costs, the Dallas-based company earned 67 cents per share. Analysts polled by Thomson Reuters were expecting 71 cents per share.

AT&T's earnings took a hit of $900 million, or 10 cents per share, in subsidies for the 2.4 million iPhones it sold, and 2 cents per share in hurricane damage.

Revenue rose 4 percent to $31.3 billion, matching analysts' estimates.

The figure for iPhone subsidies was considerably higher than the company had forecast. Before the second model of Apple Inc.'s handset, the iPhone 3G, went on sale July 11, AT&T predicted that the subsidies would cost it 10 cents to 12 cents per share this year, and the same amount next year. It apparently reached the lower bound of that range in one quarter.

The iPhone subsidy works out to about $375 per unit. The final price in stores is $199 or $299 depending on the model. AT&T says the subsidy will pay off in the end, because iPhone owners are voracious consumers of data services and pay 60 percent more month in service fees than owners of other phones. They're also more likely to stay with AT&T, which is the sole carrier for the phone in the U.S.

"I know some of you are concerned with the dilution we experienced this quarter with the new iPhone launch," Chief Financial Officer Rick Lindner told analysts on a conference call. "But I believe our results will bear it out that it is an important investment in our future."

Strong iPhone results were expected from AT&T after Apple said Tuesday it had sold 6.9 million phones worldwide in the quarter.

AT&T shares jumped 3 percent in extended trading Tuesday evening after that announcement, but after its own results were released Wednesday, the shares fell $1.95, or 7.6 percent, to close at $23.78.

Overall, AT&T added 2 million new wireless subscribers, at the high end of analyst estimates. It ended the quarter with 74.9 million subscribers. Of the iPhone buyers, 40 percent, or nearly 1 million, came from other carriers.

Soleil Securities analyst Gregory Lundberg said the wireless business was, for now, a safe haven for the company in a stormy economy. But "when the magic of the iPhone comes out of the market," AT&T's results will suffer, because it's not that competitive when it comes to cheap phones and service, he said.

AT&T also announced Wednesday that another high-end phone, the long-awaited BlackBerry Bold 9000, will go on sale on Nov. 4 for $300. BlackBerry maker Research in Motion Ltd.'s new flagship was initially expected to be available this summer.

In the traditional phone company business, AT&T lost 10.6 percent of its voice lines from a year ago as customers continued to go wireless-only or sign up for phone service from cable companies. Calling revenue declined 8.1 percent to $9.5 billion.

Lindner said there was little sign of the weak economy speeding up line losses, and disconnects due to nonpaying customers were actually down from a year ago.

Still, Analyst Craig Moffett at Sanford Bernstein said the wireline results were disappointing, and would probably worsen further with the economy. However, AT&T's stock has already been punished heavily along with the rest of the industry by jittery investors, and Moffett rates it at "Outperform."

AT&T reversed a declining trend in broadband and added 148,000 new subscribers. It introduced promotions on DSL service in the quarter to win back market share from cable companies.

AT&T also added 232,000 customers to its own cable-like video service, for a total of 781,000.

Sales to large corporate customers were $4.7 billion, down 1.4 percent from a year ago due in part to economic pressures.

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