AT&T Inc. on Tuesday posted higher-than-expected quarterly profit on strong wireless subscriber growth, but results of the first two days of iPhone sales fell short of forecasts.

The iPhone results sent A&T stock down slightly, but shares of Apple Inc., which makes the eagerly anticipated device, fell as much as 5 percent.

AT&T, the sole U.S. service provider for Apple's first phone, said it had activated 146,000 iPhone subscribers in the first two days after launch on June 29.

They likely sold many more phones than they activated, said Cross Research analyst Shannon Cross. That being said, the Street was probably around 250,000, so it's maybe a bit light.

AT&T, the top U.S. telecommunications service provider, said second-quarter net profit rose 61 percent to $2.9 billion, or 47 cents a share, from $1.8 billion, or 46 cents a share, a year earlier.

On an adjusted basis, which excludes costs and accounting effects from acquisitions, profit rose to 70 cents per share from 58 cents. That beat the average analyst forecast of 67 cents, according to Reuters Estimates.

Revenue rose to $29.5 billion from $15.8 billion. Adjusted revenue, which combines sales from AT&T, BellSouth and Cingular Wireless in both periods, rose 2 percent to $29.8 billion, in line with market expectations.

But investors focused on the iPhone data. AT&T said more than 40 percent of iPhone activations were new customers.

Pacific Crest analyst Andy Hargreaves said he had expected 400,000 iPhone sales for the first two days, but added that sales figures for coming months would be more telling than the first few days.

The difference (between sales and activations) is going to be what was sold on eBay or activations that didn't happen immediately, Hargreaves said. There were some problems with activations but from what we heard it was minimal.


Soleil Sur Terre Research analyst Todd Rethemeier said the market might have expected too much from the iPhone, which was only on sale for two days in the quarter.

The wireless numbers overall were decent, he said.

The company's wireless unit -- which has scrapped the Cingular Wireless name for the AT&T brand -- added 1.5 million subscribers in the quarter, bringing the total to 63.7 million. That exceeded the average forecast of 1.25 million additions from six analysts polled by Reuters.

Rethemeier said his main concern from the results was that while AT&T's earnings beat by 3 cents a share, it was mostly noncash. The company said adjusted earnings included gains of 2 cents per share from a tax benefit and asset sales.

We were hoping to see some further savings from the various mergers, he said. Rethemeier, who has a hold rating on the stock, owns AT&T shares, although his company does not.

AT&T has been relying on wireless and Internet services for growth, amid a decline in traditional phone service subscribers. It bought BellSouth Corp. late last year, consolidating ownership of their Cingular wireless joint venture.

AT&T said it had 13.3 million consumer and business high-speed Internet connections, up 20 percent from a year earlier.

It said 35 percent of its consumer lines had the company's broadband service, up from 27.8 percent a year earlier.

The company also said its Internet-based video service called U-verse showed strong growth in the quarter, ending with 51,000 video subscribers, up from 13,000 three months earlier. U-Verse costs were in line with previous estimates, it added.

AT&T expects to continue to operate at the top end of its previously provided outlook for a 2007 operating income margin range of 23 percent to 24 percent.

The company's shares fell 7 cents to $39.96 in morning New York Stock Exchange trade. Apple was down $4.68, or 3.3 percent, at $139.02 on Nasdaq after falling as low as $136.55.

(Additional reporting by Franklin Paul and Sinead Carew)