U.S. telecom giant AT&T Inc. (NYSE:T) has said that it sold about six million smartphones in the first two months of the fourth quarter and expects to break the previous single-quarter smartphone sales record of 6.1 million, thanks mainly to Apple iPhone 4S.

AT&T, which activated more than one million units of iPhone 4S in the first five days that the device was available, seems to be the biggest beneficiary of iPhone upgrades this holiday season and has cashed in on customers who were waiting for the launch of a new iPhone.

If AT&T just maintained the current sales rate in the month of December that was experienced in October and November, smartphone units would rise by nearly 90 percent sequentially in 4Q11, Ticonderoga Securities analyst Brian White wrote in a note to clients.

With December highlighted as one of the strongest months for smartphone sales at Dallas-based AT&T, the company expects record performance in the December quarter.

We believe this is important as no other smartphone vendor was mentioned in today's release, White added.

In the third quarter, AT&T activated 2.7 million iPhones, while totally 4.8 million smartphones were activated. By comparison, Verizon Communications (NYSE:VZ) sold 2 million iPhones in the third quarter and in total 5.6 million smartphones were sold.

In terms of Apple's total iPhone unit sales, the company sold 17.07 million iPhones in the September quarter and White expects the Cupertino, Calif.-based Apple to sell 29.9 million units during the December quarter, representing 84 percent growth from the third quarter.

While impressive, this should not be surprising given the latest iPhone 4S launch and seasonality.  In fact, we have forecast AT&T will sell 8.7 million smartphones in Q4 and there is probably no reason we need to adjust that estimate, BTIG analyst Walter Piecyk wrote in a blog post.

With each new iPhone revision, AT&T sees a tidal wave in upgrades from existing customers and Piecyk believes smartphone customers upgrade their phones at least twice as fast as feature phone users.

Piecyk expects an upgrade rate of 10.5 percent in calendar fourth quarter of 2011 based primarily on seasonality and the Oct.14 launch of the iPhone 4S and price cuts on the iPhone 4 and 3GS. 

In the third quarter of 2010, AT&T upgraded 10.3 percent of its customer base largely because of the June 24 launch of the iPhone 4 and the price cut on the iPhone 3GS.   

AT&T's disclosure of selling over 1 million iPhones in the first week of its launch indicates that smartphone sales averaged over 500,000 per week in the remaining weeks of the quarter.

Our estimate of 8.7 million smartphone sales in CQ4 2011 and the disclosure by AT&T implies smartphone sales of roughly 600,000 per week for the month of December, an achievable number given the pace of holiday sales, Piecyk said. 

If the analyst's numbers are correct AT&T's smartphone penetration should rise to over 56 percent by the end of calendar year 2011 and be on pace to reach his estimate of 68 percent smartphone penetration by the end of 2012.

Apple implications

Piecyk expects AT&T, the largest iPhone carrier in the world, to sell 5.3 million iPhones in the fourth quarter of 2011, representing over 50 percent of AT&T's post-paid device sales and nearly 60 percent of smartphone sales. 

AT&T is unique in that it has a large installed base of iPhone customers, which represent over one third of AT&T's post-paid customers and 65 percent of its smartphone customers based on the continual upgrade patterns of Apple customers and the stickiness of two year contracts and family plans. 

We further estimate that the iPhone generates 45% of AT&T's post-paid service revenue. We do not expect Sprint and Verizon, which have developed a strong Android base, to approach as high mix of iPhone sales as AT&T, but we expect their iPhone sales of 1.75 and 3.75 million, respectively, to contribute to a strong quarter for Apple, said Piecyk.

Speaking at the UBS 39th Annual Global Media and Communications Conference in New York, AT&T CFO John Stephens said that iPhone 4S sales remain strong and added that the carrier will turn up additional 4G LTE markets, including New York City, this month, and expects to cover 70 million people with its LTE network by the end of 2011.