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AT&T reports boost from iPhone, but at a cost

By Ritsuko Ando
/ Source: Reuters

By Ritsuko Ando

NEW YORK (Reuters) - Apple Inc's iPhone is giving its sole U.S. carrier AT&T Inc a big boost in subscribers and buffering the impact of slower landline sales, but the success is coming at a cost that many AT&T investors do not like.

Because AT&T offers subsidies to make the iPhone more affordable in exchange for a commitment to monthly payments, strong sales lift its revenue but hurt profit margins. That weighed on the company's third-quarter results and drove its shares down 4 percent by midday on Wednesday.

AT&T gained 2 million net new subscribers in the third quarter, in line with the average estimate of five analysts polled by Reuters. Overall revenue rose 4 percent to $31.3 billion, also in line with Wall Street's forecast.

But it cut its forecast for profit margins this year, saying it now expects wireless margin to be "better than 37 percent," compared to its previous forecast of 39 to 40 percent.

"It's more dilution than even AT&T figured," Stifel Nicolaus analyst Chris King said, adding that the company may not know for years whether the deal is worth it.

"They'll need to hold on to these customers for at least three years to make it worthwhile."

According to Reuters Estimates, third-quarter profit excluding hurricane-related expenses and amortization costs but including costs related to the iPhone was 69 cents per share, lower than the average analyst forecast of 71 cents.

AT&T also lowered its forecast on full-year, adjusted operating income margin to 23 percent from a previous outlook of 24 percent.

Quarterly profit rose to $3.23 billion, or 55 cents a share, from $3.06 billion, or 50 cents a share, a year earlier.

EYEING THE LONG TERM

The company said its deal with iPhone would prove valuable in the long run. The thinking is that advanced phones help attract new customers, who use their phones more and therefore pay higher bills.

"I know some of you will be concerned with the dilution we experienced this quarter with the new iPhone launch, but I believe our results will bear it out that it is an important investment in our future," said Chief Financial Officer Rick Lindner.

Analyst Todd Rethemeier at Soleil Securities also said the success of the iPhone was good for AT&T in the long run. He kept a "hold" rating on the shares, saying a steady dividend and solid cash flow meant limited risk amid a weak economy.

AT&T, along with No. 2 player Verizon Communications Inc , has been depending on wireless subscribers for growth amid a decline in its traditional wireline customers.

Wireline voice revenue fell over 8 percent year-on-year, AT&T said. Analysts also noted an acceleration in wireline losses, a trend they have blamed on consumers opting for cheaper services offered by cable providers and Internet companies.

Bernstein Research analyst Craig Moffett said a weak economy may be encouraging more customers to disconnect.

"Our worry has been that wireline telephony is increasingly viewed as a discretionary item," he said. "The easy alternative of 'cutting the cord' or switching to lower-priced cable telephony threaten to make an already bad situation worse."

AT&T has also been banking on growth in high-speed Internet services to stem the rapid decline in wireline customers, but analysts were unimpressed with the quarterly data.

The company said it had 14.8 million wireline broadband subscribers, up just 148,000 over the quarter.

The shares fell $1.03 to $24.70 by midday. Verizon's shares fell 5.2 percent or $1.46 to $26.55.

(Additional reporting by Sinead Carew; Editing by Lisa Von Ahn and Derek Caney)