U.S. News

AT&T Posts Higher Profit, But iPhone Results Miss Forecasts

AT&T posted higher-than-expected quarterly profit, boosted primarily by its acquisition of BellSouth, as well as gains in wireless subscribers and revenue. However, results of the first two days of iPhone sales fell short of forecasts.

The iPhone results sent AT&T shares down slightly -- but shares of Apple, , which makes the eagerly anticipated device, fell as much as 5 percent.

AT&T Communications corporate offices at 175 East Houston St. in San Antonio.
Toby Jorrin

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

More than 40 percent of the devices went to new AT&T subscribers, and sales continue to be strong in July, the company said.

"Expectations were certainly high, but I'm pleased to say that iPhone has truly met them," said Chief Financial Officer Rick Lindner during a conference call with analysts.

He said the device, which is being purchased by subscribers with higher-than-average rate plans, would continue to boost demand for its growing wireless data services.

"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, 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. That beat the average analyst forecast of 67 cents, according to Reuters Estimates.

Revenue rose to $29.5 billion from $15.8 billion. 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.

Focus on iPhone

But investors focused on the iPhone data. AT&T said more than 40 percent of iPhone activations were new customers.

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

"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."

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.

Rethemeier said his main concern from the results was that while AT&T's earnings beat by 3 cents a share, it was mostly noncash. The company said adjusted earnings included gains of 2 cents per share from a tax benefit and asset sales.

Further Savings Expected

"We were hoping to see some further savings from the various mergers," he said. Rethemeier, who has a "hold" rating on the stock, owns AT&T shares, although his company does not.

AT&T has been relying on wireless and Internet services for growth, amid a decline in traditional phone service subscribers. It bought BellSouth late last year, consolidating ownership of their Cingular wireless joint venture.

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 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.