AT&T Earnings on Target as Subscribers Snap Up iPhone 4s

AT&T (T) posted strong third-quarter sales on the back of iPhone 4 transactions, exceeding Wall Street's revenue expectations and hitting its mark for earnings, according to the quarterly report it released today.

The telecom giant reported revenues of $31.6 billion, a 2.8% increase over a year ago, as it posted a record third-quarter net gain in the number of wireless subscribers. Wall Street was expecting AT&T to generate revenues of $31.23 billion in the quarter.

AT&T's net income reached $12.3 billion for the three month period, or $2.08 a share. But when excluding a one-time gain from the sale of Sterling Commerce, AT&T's net income was 55 cents a share, in line with analysts expectations and 1 cent more than the same time last year.

"Terrific Mobile Broadband Quarter"

During the quarter, AT&T posted a net gain of 2.6 million wireless subscribers, giving it 92.8 million folks on its wireless service. Part of that net gain included 745,000 "postpaid" net adds. Postpaid subscribers reflect the number of new customers who have signed on in a given period, a number that Wall Street closely follows. While AT&T touted the number, Credit Suisse analyst Jonathan Chaplin was expecting 818,000 new customers in the quarter, according to his report.

"This was a terrific mobile broadband quarter," AT&T CEO Randall Stephenson said in a statement. "A record number of customers signed new two-year contracts, and integrated device sales outpaced our previous best by a wide margin. Wireless revenues continue to grow, churn is reaching record low levels, and postpaid ARPU [average revenue per user] increased for the seventh straight quarter."

The number of customers dropping AT&T service versus the number subscribers, otherwise known as churn, was 1.14% for its postpaid subscribers, one of AT&T's better quarterly performances. AT&T is still the exclusive carrier of Apple's (AAPL) iPhone in the U.S., and Apple released the iPhone 4 just as the second quarter was coming to a close. That gave AT&T's third quarter the benefit of a full quarter of iPhone 4 sales. The telecom said it activated 5.2 million iPhones during the period, the most in a quarter yet. AT&T added that 24% of those were for new customers.

Tiered Data Plans: So Far, So Good

In addition to its wireless subscribers, AT&T's revenues received a boost from its data plans. The nation's second-largest carrier posted a 30.5% increase for this category, to $4.8 billion from users texting, accessing the Internet and other related services. During the quarter, 21.5% of AT&T's wireless subscribers signed up for data plans.

AT&T may have also benefited from its recent move to a tiered fee system. Last June, it announced it was going to a two-tier system that would cap new customers' data usage and then charge an additional fee per gigabyte if they exceeded that level.

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That action apparently didn't prompt customers to flee to Verizon Wireless (VZ), which still offers an unlimited plan. When asked about his concerns regarding the customers gravitating to Verizon, Ralph de la Vega, CEO of AT&T Mobility and Consumer Markets, pointed to the record number of third-quarter subscribers.

De la Vega didn't address industry sentiment that AT&T's exclusive iPhone contract may expire early next year, but he did weigh in on a question regarding the iPhone potentially losing ground to Google's Android phones and Windows Phone 7.

He noted innovation among mobile handset makers and software developers is moving at an increasingly rapid pace, and that AT&T more concerned with offering as wide of a selection as possible to steer customers its way.

Meanwhile, AT&T's traditional wired phone business posted a decline of 3% to $15.3 billion in revenues, compared to the previous year and came in roughly were some analysts had predicted. AT&T noted that while its wireline business continues to decline, the erosion rate was its smallest in the past six quarters.

No Reason to Split the Company

When questioned whether AT&T would entertain splitting the company in two -- a wireless company and a wireline company -- both de la Vega and Chief Financial Officer Richard Lindner said AT&T is better off as one entity.

"More than ever before, we think there are advantages and strengths in having a combination of wired and wireless assets," said Lindner. "Companies want the convenience of mobility and access to data and content by way of a variety of devices, because that's the way people want to access the network."

De la Vega added that as more customers carry smartphones, companies want to maintain wired service to handle such tasks as pumping out video.