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AT&T profit down, but company upbeat about Q4

Profit fell sharply due to year-ago special gains, but wireless customer growth looked solid.

AT&T posted a decline in its third-quarter profit today, although results largely fell in line with expectations and the company's wireless-customer growth remained solid.

The Dallas telecommunications titan reported a quarterly profit of $3.6 billion, or 61 cents a share, down significantly from a year-earlier profit of $12.3 billion, or $2.07 a share, when the company's results benefited from a tax settlement and the sale of a business unit. Revenue fell 0.3 percent to $31.5 billion.

Analysts on average estimated per-share earnings of 61 cents and revenue of $31.6 billion, according to Thomson Reuters.

AT&T's operating income margin rose to 19.8 percent, compared to 17.2 percent from a year ago.

"We're pretty happy with the quarter," said Todd Rosenbluth, an equity analyst at Standard & Poor's, who said there were few surprises in the results.

The company's revenue strength was again attributed to its wireless business--it crossed the 100 million-subscriber mark for the first time in the third quarter. Partially driving that growth was the iPhone. The company said it activated 2.7 million iPhones in the period, roughly half the number from a year ago, when the iPhone 4 launched. While the number of iPhone activations declined in the period, it held up relatively well despite AT&T losing its exclusive rights to sell the phone. One of its advantage is its ability to sell the lower-end iPhone 3GS for $49, luring in budget-conscious consumers. In total, it sold 4.8 million smartphones.

Apple on Tuesday reported iPhone sales figures that fell below Wall Street analysts' target, which many expected to translate to lower iPhone sales for AT&T. A high number of iPhone activations leads to lower margins because of the subsidies AT&T pays Apple.

The carrier, like its rivals Verizon Wireless and Sprint Nextel, is willing to take an immediate financial hit with the iPhone because it leads to more loyal customers willing to spend more each month. Verizon reports its results tomorrow.

Sales of the newly released iPhone 4S don't factor into the third-quarter results because the handset came out last week, well after the close of the quarter in September. As a result, analysts are expecting an increase in iPhone sales following the 4S launch, resulting in a hit to AT&T's profit in the fourth quarter.

AT&T also said today that it had activated 1 million iPhone 4S devices in the first five days of its launch, making it the most successful iPhone launch in the company's history. As a result, Ralph de la Vega, the head of AT&T's wireless and consumer businesses, said he expects an "unbelievable" fourth quarter.

AT&T's wireless business posted revenue growth of 2.8 percent to $15.6 billion. It added 319,000 net post-paid subscribers, or customers who sign a long-term service contract, down from 745,000 such customers added a year ago. AT&T isn't alone there. All major wireless providers have been dealing with slowing growth in the post-paid business. AT&T has opted to offset that slowdown with an emphasis on connected devices such as e-readers and digital picture frames, which yield lower revenue for the company but higher margins. It added more than 1 million connected devices in the period.

While the iPhone continues to drive a large portion of its growth, AT&T has worked to diversify its lineup with other phones, including announcing five Android devices at last week's CTIA trade show.

The wireline business, which still generates a significant (albeit fading) portion of its revenue from traditional landline phones, posted revenue of $15 billion, a 2.2 percent decline from a year ago. Countering the deteriorating landline business is the company's investment in its U-Verse bundle of TV, Internet, and phone services.

Chief Financial Officer John Stephens, speaking on a conference call with analysts today, said he was pleased with the turnaround at AT&T's business, which showed its first sequential revenue growth in a few years. AT&T's business unit has suffered from high unemployment and tightened corporate budgets.

Stephens, however, was relatively quiet on the issue of AT&T's planned acquisition of T-Mobile USA. The Department of Justice has sued to block the deal, and AT&T is preparing to either come to a settlement or take the matter to court.

He reiterated that the review by the Federal Communications Commission was still continuing, and that the company remained hopeful on reaching a solution with the Justice Department, either through the court or in a settlement. The company continues to believe the merger will go through.

Updated at 8:27 a.m. PT: with additional executive and analyst comments and background throughout.

Corrected at 5:26 a.m. PT: An earlier version of this article used year-earlier figures for the number of iPhone activations, subscriber growth, operating margins, and wireless and wireline revenue.