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AT&T Profit Gets an iPhone Bill

NEW YORK -- AT&T's success in selling Apple's iPhone (NASDAQ: AAPL) is haunting the top U.S. phone carrier, at least for now.

Because AT&T (NYSE: T) offers subsidies on the iPhone to help discount its price for consumers, strong sales of the gadget will boost the carrier's revenue but hurt its profit margins. That weighed on AT&T's third-quarter results and drove shares down 6 percent on Wednesday.

AT&T, the sole U.S. carrier for the iPhone, also cut its forecast for profit margins this year, saying it was now expecting wireless margin to be "better than 37 percent," compared to its previous forecast of 39 to 40 percent.

Analyst Todd Rethemeier at Soleil Securities said that while the iPhone's impact was greater than he expected, this was not necessarily bad news for AT&T in the longer term.

He has a "hold" rating on the shares, saying a steady dividend and solid cash flow meant limited risk for investors amid a weak economy.

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

The company 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.

Third-quarter net profit rose to $3.23 billion, or 55 cents a share, from $3.06 billion, or 50 cents a share, a year earlier.

According to Reuters Estimates, 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, along with No. 2 player Verizon Communications (NYSE: VZ) 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 noted the 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 6.37 percent to $24.09 in morning trade. Verizon's shares were down 5.8 percent at $26.38.