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iPhone Good, Bad for AT&T's Earnings

NEW YORK -- AT&T (NYSE: T) reported a fall in quarterly profit despite strong wireless sales, due to high costs of supporting Apple's (NASDAQ: AAPL) popular iPhone and more customers disconnecting their traditional phones.

While the top U.S. phone company added a net 2.1 million subscribers during the quarter, higher than the average analyst forecast for 1.9 million subscribers, investors remained concerned about a weakening wireline business.

"Wireless is holding up very well. Better than expected results there," said David Dixon, an analyst at Friedman, Billings, Ramsey. "But it is not a rosy picture. We're talking about a stellar performance in the context of a very difficult macro environment."

Land line voice revenue, or sales to traditional phone customers, fell 10 percent to $9 billion -- a drop some analysts said was steeper than expected.

The company also told investors on a conference call that significant share buybacks were unlikely in 2009 as it focuses on paying dividends and preserving its balance sheet.

"They're girding for a difficult environment," said Edward Jones analyst Rick Franklin.

Shares of AT&T fell 40 cents to $25.53 in early afternoon trading on the New York Stock Exchange.

IPHONE SUBSIDIES

AT&T pays subsidies for the right to be the sole U.S. carrier for the iPhone, a cost that weighed on profit by 7 cents a share in the fourth quarter.

As a result its quarterly profit, excluding items such as merger-related expenses and severance costs, fell to 64 cents a share from 71 cents a share. That was roughly in line with analysts' expectations.

Net profit fell to $2.4 billion, or 41 cents per share, from $3.1 billion, or 51 cents per share, a year earlier. Revenue rose 2.4 percent to $31.1 billion, also in line with Wall Street's expectations.

The company has said the iPhone subsides are worthwhile as the popular phone attracts new, higher-spending customers. Around 40 percent of those signing up for the iPhone were new to AT&T, it said, and forecast iPhone-related costs to decline in 2009.

AT&T, along with Verizon Communications Inc, has been depending on wireless subscribers for growth amid a decline in its traditional wireline customers.

"LEGACY" DECLINE ACCELERATES

Unlike a decade ago, consumers are now able to disconnect their home phones and instead use their wireless phones or switch to cheaper alternatives offered by cable and Internet companies.

AT&T said its "legacy" business was being hit by a weak economy.

"We've had declines in those areas over the last several years, and we have done a pretty good job of taking costs out of the business and balancing that on the margin, and maintaining margins as a result," Chief Financial Officer Rick Lindner said.

"But in this economy, and you see it in everyone's results, the declines in some of those legacy products have accelerated."

The company forecast "solid results" for 2009 with revenue growth in the low single-digit range, led by wireless and Internet services.

But it said it would trim capital spending by around 10 to 15 percent from 2008 levels. AT&T had warned of tighter spending when it announced in December that it would eliminate 12,000 jobs to cope with an economic downturn.

AT&T said it does not anticipate significant pension funding requirements in 2009, but forecast pension and other retiree-related costs to drag down annual earnings by 19 cents a share.

Verizon said on Tuesday that it expects pension and other post-retirement costs to weigh on 2009 earnings.