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AT&T gearing up for an 'unbelievable' fourth quarter

Thanks to the iPhone, the company, which reported quarterly earnings today, is bullish heading into the holiday selling season.

Lines in front of this AT&T store in New York during the iPhone 4S launch. Maggie Reardon/CNET

AT&T is looking forward to an "unbelievably" happy holiday.

The company expects its best smartphone sales ever in the fourth quarter, according to Ralph de la Vega, head of the consumer and wireless businesses.

"We expect blockbuster smartphone sales in the fourth quarter," de la Vega said today during a conference call following its third-quarter report, further fueling the expectations by saying the results would be "unbelievable."

Smartphone adoption has long been the key to AT&T's ability to keep its revenue growth humming. A customer who signs a two-year contract to get a smartphone tends to spend more each month and is less likely to leave the carrier. Smartphones, particularly high-profile devices such as the iPhone 4S, are important tools in both adding and retaining the most affluent subscribers. After a softer third quarter, the company is looking to bounce back quickly.

And it's off to a great start. AT&T earlier today said it activated 1 million iPhone 4S devices in the first five days of sales, making it the most successful iPhone launch in the company's history. That comes despite Verizon Wireless and Sprint Nextel both offering the iPhone 4S as well.

That compares to 2.7 million iPhones activated in the third quarter, or half of the figure from a year ago, when the iPhone 4 first launched. The lower activation numbers were a result of consumers holding off on a purchase and waiting for the next iPhone.

In total, the company sold 4.8 million smartphones, a good sign that AT&T is weaning itself off of its reliance on the iPhone and further embracing Android. In fact, the company unveiled five new Android smartphones at a wireless conference last week.

"That they were still adding smartphone subscribers with a delay in the iPhone refresh bodes well," said Todd Rosenbluth, an equity analyst at Standard & Poor's. "People weren't just waiting and completely holding off."

The iPhone 4S launched on Friday, too late for the third-quarter results, and will be accounted for in the fourth quarter.

The stronger smartphone sales in the fourth quarter should result in 2 percent year-over-year growth in average revenue per user, de la Vega said. The average revenue slowed a bit in the third quarter, a concern that several analysts brought up during the conference call and in research notes.

Beyond the latest and greatest iPhone, de la Vega said the older iPhone 3GS continues to be a hot item. AT&T is the only carrier offering the 3GS, which is free with a two-year contract. De la Vega said the 3GS has lured in more new subscribers than other devices.

"We're seeing tremendous demand for that device," he said, adding that it is out of stock.

The company, like the other carriers, is also offering the iPhone 4 for $100.

AT&T believes there remains an opportunity to further expand its base of smartphone customers. For the first time, more than half of its wireless contract customers use smartphones, and two-thirds of its new customers purchase smartphones.

He expects a lot of customers to upgrade from quick-messaging devices and basic phones to a smartphone in the fourth quarter, largely drawn in by the iPhone. In two to three years, he expects everyone in AT&T's customer base will be using a smartphone.

Down the line, de la Vega said he plans to introduce more tiered data options to better take advantage of smartphone growth and increased data use. He also points to the opportunities created by tablets, mobile hot spot cards, and other connected devices.

"The growth opportunity is off the charts on this," he said.