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AT&T Profit Beats Estimates on Demand for IPhone

Apple IPhone Security Flaw Highlighted by Symantec
An Apple iPhone 4 sits on display at an Apple store. Photographer: Rupert Hartley/Bloomberg

AT&T Inc., the largest U.S. phone company, reported second-quarter profit that beat analysts’ estimates as customers snapped up wireless devices like Apple Inc.’s iPhone.

Earnings, excluding a one-time gain, rose to 61 cents a share, AT&T said in a statement today. Analysts projected 57 cents on average, according to estimates compiled by Bloomberg. Sales advanced less than 1 percent to $30.8 billion.

AT&T is relying on its exclusive contract to carry the iPhone in the U.S. to fend off competition from Verizon Wireless, which is touting smartphones such as the Droid X. AT&T, which gets more than 40 percent of its sales from its wireless unit, activated 3.2 million iPhones in the period and gained a net 496,000 contract subscribers.

“They had very strong revenue,” Chris Larsen, an analyst at Piper Jaffray & Co. in New York, said in an interview. “And with the strong iPhone sales, it means they’ve got that many customers under contract for two years.” Larsen has an “overweight” rating on AT&T shares.

The carrier raised its forecast for 2010 earnings, without giving specific numbers. It predicted “strong” profit growth and “improved” operating margins, compared with a previous forecast of “stable-to-improved” earnings and margins.

AT&T, based in Dallas, rose 59 cents, or 2.4 percent, to $25.51 at 4:01 p.m. in New York Stock Exchange composite trading, for the biggest one-day gain since June 8. The shares have lost 9 percent this year.

Saturating Market

The iPhone is helping AT&T win customers even as the U.S. wireless market nears saturation. Apple sold 1.7 million units of its new iPhone 4 worldwide in the first three days after its June 24 debut and said this week it is taking steps to overcome supply shortages for the device.

Still, customer gains at AT&T and rivals are slowing. There are enough mobile devices for more than nine out of 10 people in the U.S., according to the CTIA wireless industry association.

Jennifer Fritzsche, an analyst at Wells Fargo & Co., estimated 500,000 contract subscriber gains for AT&T. In the year-earlier period, AT&T added 1.2 million such users.

About 27 percent of AT&T’s iPhone sales were to new customers, down from more than 33 percent in the first quarter.

Network Improvements

AT&T has faced criticism for dropped calls in New York and San Francisco. Chief Financial Officer Richard Lindner said today on a conference call that the carrier has reduced the number of dropped calls in the New York area by 13 percent and by 23 percent in Manhattan alone since the fourth quarter.

He said improvements to the voice network in San Francisco are running about 90 days behind those in New York. “We are moving heaven and earth to execute our network plan,” he said.

AT&T’s results could serve as a bellwether for Verizon Wireless, the largest U.S. mobile-phone carrier, which reports earnings tomorrow. Verizon Wireless and Sprint Nextel Corp. are luring customers with new devices that run Google Inc.’s Android software, such as Motorola Inc.’s Droid.

Verizon Wireless, which is co-owned by Verizon Communications Inc. and Vodafone Group Plc, may begin selling the iPhone as soon as January, two people familiar with the plans said last month.

Slowing Defections

AT&T’s net income in the three months through June rose 26 percent to $4.02 billion, or 68 cents a share, from $3.2 billion, or 54 cents, a year earlier. The carrier had a gain of 7 cents a share from an exchange of Telmex Internacional SAB stock for America Movil SAB stock.

AT&T has considered international investments, particularly in emerging markets, though it hasn’t found an appealing one yet, Lindner said. “We would want the ability to have substantial control over operations,” he said, without giving specifics.

The reported results exclude business-software provider Sterling Commerce, which AT&T agreed to sell to International Business Machines Corp. in May. Including results from Sterling, revenue was $30.9 billion. Analysts projected $30.8 billion, the average of estimates compiled by Bloomberg.

Sales at the mobile unit rose 10 percent to $13.2 billion. AT&T said it reduced the monthly rate at which customers left, known as churn, to 1.29 percent from 1.48 percent, a record low.

Wireline voice sales fell 13 percent to $7.2 billion and data sales rose 8.3 percent $6.8 billion.

The carrier, which has reduced its workforce by more than 10,000 since the end of last year to 272,450 at the end of June, cut operating costs by 1.7 percent to $24.7 billion.

“They’ve been very committed to expense reductions and it’s certainly a positive if they can continue lowering that while increasing revenue,” Tim Horan, an analyst at Oppenheimer & Co. in New York, said in an interview.

Brooks McCorcle, AT&T senior vice president of investor relations, said in an interview the company plans to make further workforce reductions this year, particularly in the wireline business. She didn’t give specifics.

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