Jul 25, 2007 4 min read

By Michelle Roberts Associated Press Writer

SAN ANTONIO (AP) – AT&T Inc.’s earnings jumped 61 percent in the second-quarter, driven mostly by its acquisition of BellSouth Corp. but also boosted by new wireless subscribers and better sales to large business customers.

The nation’s largest provider of broadband Internet and land and wireless phone services said Tuesday that 146,000 subscribers activated new iPhones in the first 30 hours of sales as the quarter closed – news that seemed to disappoint Apple Inc. investors a day ahead of that company’s earnings release. The hotly anticipated device that combines phone, media player and Web-surfing capabilities can only be used on AT&T’s network as part of exclusive deal between the companies.

For the quarter that ended June 30, AT&T said net income rose to $2.9 billion, or 47 cents per share, from $1.81 billion, or 46 cents per share in the prior year’s quarter. Wireless subscribers rose by 1.5 million to 63.7 million, AT&T said.

A tiny amount of that growth was driven by the iPhone introduction, with more than 40 percent of the early iPhone activations done by new AT&T subscribers. Sales continue to be strong in July, the company said.

“We’re elated with the iPhone launch,” said Chief Financial Officer Rick Lindner in an interview Tuesday.

IPhone buyers sign two-year contracts and have higher-than-average rate plans and will likely continue to boost demand for wireless data services, an area of business that saw strong growth during the second quarter, he said.

Lindner noted that AT&T’s numbers represented activation rates, which are different from the number of units sold.

Analysts, too, said any reaction of first-day sales of the iPhone were probably unfair.

“The activations might have been a little light, but I’m not necessarily sure you can read a lot into that,” said Christopher King, an analyst for Stifel Nicolaus & Co.

The quarter overall was in line with expectations, he said.

Excluding acquisition costs, AT&T had earnings of 70 cents, up from 58 cents per share for the same three months last year and above the 67 cents average estimate of analysts polled by Thomson Financial.

Revenue for the quarter was $29.5 billion, up from $15.8 billion in the year-earlier quarter.

Revenue growth continues to be driven by wireless data use for services like messaging, downloads and laptop connectivity. Revenue from that business was up 67 percent for the quarter to $1.7 billion, a trend Lindner said would continue to ramp up.

The margins for the wireless business, however, were squeezed in the second quarter as AT&T offered more discounts on higher-end phones in the fight to acquire customers willing to spend more on monthly plans and for premium services.

The price war in the wireless business will likely get bloodier, said Zachary Research Investment analyst Patrick Comack, but he said AT&T had a very good quarter.

“The only disappointment was the wireless margins,” he said.

The company, which has struggled to turn around losses in its large business sales, saw marked improvement during the second quarter because of demand for data services.

Lindner said the company is on the verge of turning that segment into positive sales growth.

The company also reported growth in the subscriber base for its U-verse television service, a premium service that uses a high-speed Internet connection for delivery. By the end of June, U-verse had 51,000 subscribers in the 23 cities in which it is available, up from the 13,000 users at the end of the first quarter.

It expects to be doing 10,000 installations a week by the end of the year.

AT&T is banking on U-verse to help combat competition from cable companies, which have been bundling high-speed Internet and land line phone service to lure customers away from tradition phone companies.

The company, which has grown aggressively through a string of acquisitions over the last several years, said cost savings from the integration of BellSouth reached $1.9 billion in the first six months of the year. The savings should hit $3 billion by year’s end and $5 billion by the end of 2008.

AP-ES-07-24-07 1440EDT