Apple's iPhone Boosts AT&T's Wireless Business, But Whacks Profits

Why did AT&T (T) make sacrifices to become Apple’s (AAPL) official U.S. iPhone carrier? Because it’s leading the company in growth: AT&T says it activated 2.4 million (about a third of Apple’s 6.9 million total) iPhones last quarter, including about 40% to customers who were new to AT&T. That helped the carrier add 2.0 million net new wireless subscribers last quarter, ahead of expectations.

But subsidizing all of those new 3G iPhones took a bigger than expected whack to the company’s earnings and margins. And that’s going to keep happening. From AT&T’s release:

AT&T’s third-quarter 2008 reported and adjusted margins and earnings reflect revenue growth and continued progress with previously outlined cost initiatives, offset by hurricane-related expenses and effects on wireless results from the iPhone 3G. Impacts from the company’s iPhone 3G initiative reduced pretax third-quarter earnings by approximately $900 million or $0.10 per share…

Based on third-quarter customer response, AT&T is optimistic regarding continued strong iPhone 3G activations and is confident in the long-term value created by this investment in acquiring high-value, data-centric wireless subscribers. As a result, AT&T expects its dilution associated with the iPhone 3G will run above its previous expectation, and AT&T now expects, depending on volumes, its full-year 2008 wireless service OIBDA margin to be better than 37 per cent versus its previous outlook of 39 per cent to 40 per cent. AT&T expects its full-year adjusted consolidated operating income margin to be approximately 23 per cent versus its previous outlook of approximately 24 per cent.

Why is this a good thing anyway? Because iPhone subscribers spend about 1.6 times more money on wireless service per month, and use the mobile Internet more than other subscribers — important to AT&T’s strategic goals.

Also of note, AT&T says more than two thirds of its 1.7 million “postpaid” net subscriber additions — who sign long-term contracts and pay monthly bills — bought smartphones last quarter, surely led by Apple’s iPhone. The telco says 22% of its subcribers now use smartphones, up from 10.5% a year ago.

Overall, AT&T reported in-line Q3 sales of $31.3 billion, but adjusted EPS missed consensus: AT&T posted 67 cents per share, below analysts’ 71 cents per share estimate.

See Also: Apple Investors Ignore Low Guidance, Send Shares Soaring

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