For AT& T, Exclusive iPhone Deal Has Mixed Effect on Earnings

By Cecilia Kang
Washington Post Staff Writer
Thursday, October 23, 2008

AT&T reported a 5.5 percent gain in third-quarter profit, as its exclusive agreement to sell Apple's iPhone both helped and hindered the telecommunications giant's results.

The company reported strong sales in its wireless business, fueled by the addition of 2.4 million iPhones to its network. Those gains, however, were offset by $900 million in subsidies that AT&T had to absorb by offering discounts on the phone to attract customers.

AT&T said it earned $3.23 billion during the three months ended Sept. 30, up from $3.06 billion in the comparable period last year. Revenue rose 4 percent, to $31.3 billion.

Weakness in other parts of the company, however, signaled that the global economic crisis has caused businesses and consumers to curtail spending on telecommunications services. That sent shares of AT&T lower yesterday, along with other telecom firms, as investors apparently fear a prolonged recession.

"There's a palpable sense that everything changed -- for AT&T and everyone else -- around the middle of September, when Lehman declared bankruptcy and the credit situation went from crunch to crisis," said Craig Moffett, an analyst at Sanford C. Bernstein.

Shares of AT&T closed 7.6 percent lower yesterday, at $23.78. Verizon Communications fell 8 percent, to $25.75. Sprint Nextel dropped 9.2 percent, to $3.47.

"I know some of you are concerned with the dilution we experienced this quarter with the new iPhone launch," said AT&T Chief Financial Officer Rick Lindner. "But I believe our results will bear it out that it is an important investment in our future."

In July, Apple launched its second version of the iPhone, which is only available for use in the United States on AT&T's network.

The company gained 2 million new wireless subscribers in the quarter, bringing its total subscriber count to 74.9 million. AT&T is the nation's largest wireless carrier, followed by Verizon Wireless with 68.7 million subscribers. AT&T also reported that phone service sales to businesses were down 1.4 percent, to $4.7 billion in the quarter, signaling budget clampdowns as companies brace for a downturn.

AT&T also reported softness in the traditional landline phone business, with revenue from local and long-distance calls dropping 8.1 percent as customers opt for wireless service.

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