Competition in its core business of long distance service was also a factor in the declining earnings, which AT&T said could fall below analysts' estimates by up to 10 percent. Previous forecasts had put earnings at 92 cents a share.
The fourth-quarter may also see a continued squeeze on its results, AT&T spokesman Jim Byrnes said. Wall Street analysts had estimated 89 cents a share for AT&T's fourth quarter.
"There was a softness in the consumer long distance, while we continued to invest in areas where we expect to see growth like wireless and online services," he said.
News that third-quarter results would come in below estimates caused AT&T's stock to drop 9.8 percent, closing at 51-1/2. The telecommunications giant posted its second heaviest market day in its history, with 16.8 million shares trading hands.
Analysts said the jury is out on whether AT&T can see any improvement going into the next year.
Simon Flannery, an analyst with J.P. Morgan Securities, said that "1997 remains clouded. They have to stabilize their long distance business and boost revenue."
Flannery revised his AT&T 1997 earnings forecast to $3.60 a share from $3.98 per share.
He noted that the future does not bode well for AT&T, which has not fared well competing against second- and third-tier long distance carriers. The more powerful Baby Bells have yet to get into the long-distance game in a big way, he said.
Meanwhile, AT&T has seen its general and administrative expenses rise 20 percent during the second quarter over the same time a year ago, while its revenue has grown only 2 percent.
Byrnes said AT&T expects to lose some share as the Baby Bells enter the market, but the long distance carrier hopes to make up lost revenue by branching out into other services like wireless and online connections. AT&T currently receives roughly 90 percent of its revenues from its long distance business.
AT&T is not yet disclosing revenues from its online WorldNet service, launched in March. But Byrnes said its wireless operations posted an 18 percent revenue increase during the second quarter over a year ago, to $854 million.