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AT&T Tops Estimates as iPhones Surge

AT&T's (NYSE: T) third-quarter income may have plateaued while revenues sagged slightly, but the nation's No. 2 mobile carrier juiced up a whopping 3 million iPhones and posted huge gains across the board in wireless services.

The company's net income remained largely flat at $3.28 billion, compared with $3.29 billion a year earlier. But earnings totaled $0.54 a share, down a penny from last year but ahead of Wall Street estimates of $0.50 per share, according to Thomson Reuters.

Revenue slipped 1.6 percent to $30.86 billion for the third-quarter, just shy of estimates of $30.9 billion.

Despite flat revenue, AT&T continued milking its status as exclusive carrier for the Apple (NASDAQ: AAPL) iPhone, seeing record numbers in its wireless division, which helped offset flagging landline performance.

AT&T reported its best-ever third-quarter subscriber gains. Total wireless subscribers increased by 2 million in the third quarter -- up slightly from results a year earlier and up 48 percent compared to net adds in the second quarter of this year.

Over the past 12 months, AT&T's wireless subscriber total increased by 6.7 million to hit 81.6 million. Retail postpaid net adds totaled 1.4 million -- the second highest third-quarter total in the company's history, a 20 percent jump from the second quarter of this year, according to AT&T.

AT&T also said that 40 percent of its record-breaking 3.2 million iPhone activations were new subscribers.

Despite the impressive wireless numbers, the company must absorb the immediate hit it takes from selling the iPhone at a discounted price, though over the long haul it realizes a profit from data plans and services the new subscribers use.

Industry watchers had been increasingly concerned that the wireless carrier's reliance on the iPhone -- and costs associated with infrastructure upgrades required to meet the demand of the iPhone's data-intensive demographic -- would start impacting its overall performance.

But AT&T said its mobile data traffic surged by 5,000 percent over the past three years, offsetting costs associated with new iPhone sales.

In the third quarter, wireless operating expenses totaled $10.3 billion, up 0.5 percent from Q3 2008, and up 2 percent sequentially. Wireless operating income checked in at $3.4 billion, a 41 percent spike from last year's quarter, and up 6.6 percent sequentially. AT&T's wireless operating income margin was 24.6 percent, up from 18.9 percent in the year-earlier quarter and 23.8 percent in the second quarter of this year

In addition to upticks in wireless margins, Ralph de la Vega, AT&T's mobility CEO, said a strong mix of devices in its portfolio along with network upgrades should assuage any investor angst over the dominant role the iPhone plays in its performance as they look to the future when it may lose the iconic device.

"We are well positioned for success in emerging devices, which represent the next wave of wireless growth. We are the leader in the e-reader market with the Kindle, the Sony Daily Edition, the Plastic Logic e-reader will be on our network, and also the new Barnes & Noble e-reader," de la Vega said during a conference call with analysts. "We have lined up TomTom and Garmin for navigational devices and netbooks from Dell, Acer, Lenovo and Nokia."

Android coming to AT&T?

The mobile chief also hinted that an Android smartphone would be coming to AT&T, the only major U.S. carrier that does not offer a handset powered by Google's open source mobile platform. Dell is set to release an Android phone next year, and industry watchers speculate it will arrive on AT&T.

"We mentioned before we've kicked the tires on Android, and now we're working with handset manufacturers to bring products to market," said de la Vega.

He also said that AT&T's network users can use voice and data services at the same time, a feature absent from other carriers that this provides a competitive edge as the smartphone market matures.

To meet increasing demand on its network, the carrier plans to conduct a slew of upgrades to improve its performance.

Upgrade initiatives for 2009 include 2,000 new cell sites, 100,000 new circuits for the backhaul and 3G expansions to 4,400 sites covering 370 markets.

De la Vega also said 850 MHz spectrum conversion to 3G, which provides better in-building and urban coverage, is 90 percent complete and will be finished by the end of the year.

Finally, looking to toward HSPA 7.2 and 4G, he said that 7.2 will be deployed to 25 of 30 top markets by the end of next year with 4G coming in 2011.

AT&T is also evaluating tiered pricing plans to address the issue of bandwidth hogs, where a small percentage of subscribers use most of the infrastructure resources, de la Vega said.

"We are experiencing a data explosion I've never seen before in which a lot of usage is driven by a small percentage of customers. We're studying how to address this phenomenon. How to get the small group to carry its weight, so to speak, without imposing something detrimental on the larger group," he said. "This will all be impacted by the FCC rules, Net neutrality, so the whole area is in flux, but you'll see something from us on this in the near future."

Meanwhile, AT&T attributed its tepid profits to the still lackluster economy and the downward spiral in landline use.

"We delivered a terrific wireless quarter, IP data growth was strong and execution across the business continues to be solid," AT&T CEO Randall Stephenson said in a statement.

He also pointed to areas in which AT&T is pushing hard.

"As the economy works to regain its footing, we are keenly focused on cost improvement as well as continued leadership and investment in key areas that will drive future growth," he said. "We have moved forward aggressively to further expand in mobile broadband. AT&T U-verse has good traction and is redefining our wired consumer experience. Our advanced business products have proven to be resilient, and we continue to expand our capabilities in areas like network security and global Wi-Fi coverage."

AT&T isn't the only one seeing a lift thanks to the iPhone. The carrier's mobile partner, Apple, just reported blow-out profits that wowed Wall Street.

Update adds comments from analyst call.