July 24 (Bloomberg) -- AT&T Inc., the largest U.S. phone company, reported a 61 percent increase in second-quarter profit after $140 billion in acquisitions almost doubled revenue.

Net income rose to $2.9 billion, or 47 cents a share, from $1.81 billion, or 46 cents, a year earlier, San Antonio-based AT&T said today in a statement. Sales advanced to $29.5 billion.

AT&T fueled growth with last year's $86 billion purchase of BellSouth Corp. Wireless sales rose 13 percent as AT&T activated 146,000 of Apple Inc.'s iPhones in the first two days of an exclusive sales agreement, helping to cut customer turnover to a record low. IPhone demand may have slowed in the past 10 days, CIBC World Markets analyst Ittai Kidron said today in a report.

``Some folks had considerably higher numbers or expectations for the quarter'' for iPhone activations, said Todd Rosenbluth, an analyst at Standard & Poor's in New York. He rates AT&T shares ``hold'' and doesn't own any. ``Given the market penetration they've got, it's still encouraging to us.''

Shares of AT&T fell 35 cents to $39.68 at 4:02 p.m. in New York Stock Exchange composite trading. The stock has gained 11 percent this year. Apple shares dropped $8.81, or 6.1 percent, to $134.89 on the Nasdaq Stock Market and have risen 59 percent this year.

Profit excluding some items was 70 cents. The average estimate of 24 analysts in a Bloomberg survey was 67 cents. Sales excluding some accounting items rose to $29.8 billion. AT&T spokeswoman McCall Butler said that figure compares directly with the $29.6 billion average estimate of 18 analysts in a Bloomberg survey.

Activations

The iPhone activations were a ``disappointment,'' Piper Jaffray & Co. analyst Gene Munster said in a research note. He estimated that Apple sold 200,000 iPhones in the two days to end the quarter. Analyst David Bailey of Goldman Sachs Group Inc. had estimated that AT&T and Apple sold 700,000 iPhones in their first three-day weekend.

AT&T's rate of customer turnover, also known as ``churn,'' fell to 1.6 percent from 1.7 percent a year earlier. AT&T attributed that to ``attractive handset selection'' and called iPhone sales ``robust.'' More than 40 percent of iPhone activations were for new subscribers.

``Demand continues to be strong,'' AT&T Chief Financial Officer Rick Lindner said on a conference call. ``We continue to see traffic levels in our stores above historical levels.''

Apple's Report

Since some customers bought phones and didn't activate them before the end of the quarter, Apple will report a higher figure for iPhone sales in its earnings results tomorrow, Lindner said. Apple's report will include sales of iPhones to AT&T for distribution, nearly all of which were sold in the first few days, he said.

``It will be a little different,'' he said. ``I don't know if people will consider it substantial.''

Technical problems delayed the iPhone's activation for as many as 10,000 customers who bought the devices in the first weekend, said Lindner, 52. Most glitches were resolved, he said.

In the current quarter, the percentage of iPhone subscribers coming to AT&T from competitors has risen higher than 40 percent, Lindner said in an interview. Most AT&T stores have received more phones since selling out the initial run, and the company will increase its iPhone advertising ``in the next week or so,'' he said.

AT&T's BellSouth takeover gave AT&T full ownership of Cingular Wireless, which now uses AT&T's name. The unit added 1.5 million customers, including 912,000 who pay their bills in advance. Cingular bought AT&T Wireless Services Inc. in 2004 for $41 billion, creating the largest U.S. mobile-phone service.

Wireless and TV

Chief Executive Officer Randall Stephenson is counting on revenue from wireless and television services as customers drop their home-phone lines in favor of mobile phones or digital voice plans from cable companies such as Comcast Corp. Excluding the BellSouth connections gained at the end of the year, AT&T lost 1.38 million residential phone lines in 2006.

Subscribers to the U-verse television service increased to 51,000 from 13,000 at the end of the first quarter. The company has budgeted as much as $6.5 billion over five years to develop U-verse, which started in San Antonio in 2005. The service, sold in 23 regions in the U.S., works over AT&T's phone lines.

Cable Competition

``They saw a whole lot more competition from cable companies in the quarter,'' said Charles Smith, chief investment officer at Fort Pitt Capital Group in Pittsburgh. The firm has $1.2 billion in assets under management, including AT&T shares.

Capital expenses increased to $4.12 billion from $3.34 billion in the first quarter. AT&T will invest more in the second half of the year to broaden coverage for its fastest wireless data network, Lindner said.

The quarter's results and the spending had little impact on the perceived risk of owning AT&T bonds. The offered price of credit-default swaps based on $10 million of the company's bonds fell $500 to $27,200 at 11:30 a.m. New York time, according to CMA Datavision.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt.

AT&T's wireless unit sells the iPhone, a handset that doubles as an iPod music player, with two-year contracts starting at about $60 a month. About 25 to 30 percent of iPhone subscribers are paying that minimum rate, with the rest signing up for more expensive plans, Lindner said.

IPhone Partners

AT&T is paying Apple $150 to $200 for each iPhone sold, plus $9 a month per phone for the two-year contract, TheStreet.com reported today, citing unnamed sources. Christopher Larsen, an analyst with Credit Suisse in New York, said AT&T makes a profit on the sale of each iPhone. AT&T spokesman Mark Siegel declined to comment.

Some customers anticipating the iPhone's release stayed with AT&T, helping to reduce subscriber turnover, according to analysts such as William Power of Robert W. Baird.

The second-biggest mobile-phone company, Verizon Wireless, said last week that it added 1.3 million net new customers in the second quarter. The Basking Ridge, New Jersey-based company is jointly owned by Verizon Communications Inc. and Vodafone Group Plc.

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net

Last Updated: July 24, 2007 16:11 EDT