AT&T Inc reported stronger-than-expected third quarter profit as the glitzy iPhone and low budget Tracfone service combined to attract a record number of wireless customers.

While AT&T faces home phone disconnections and a drop in business spending that led it to forecast 2009 revenue slightly below 2008 on Thursday, strength in mobile is offsetting much of the pain. Shares climbed 1.6 percent in early trade.

This is becoming a grindingly familiar pattern with strength in wireless and weakness in wireline, said Sanford C. Bernstein analyst Craig Moffett. Wireless makes up about 44 percent of AT&T's revenue.

Some investors have worried about AT&T's increasing dependency on Apple Inc's iPhone for growth because of expectations that its exclusive rights to sell the phone won't last. But at least for now iPhone is paying big dividends.

AT&T reported 3.2 million iPhone activations for the quarter compared with at least one analyst's expectation for 2.4 million iPhones. This helped it report 2 million net customer additions, including 1.4 million valuable monthly-bill paying customers. The average forecast from five analysts contacted by Reuters was for 1.5 million net additions.

Aside from the iPhone surprise, Moffett said much of AT&T's customer growth was from Tracfone, a unit of America Movil that rents space on AT&T's network and offers prepaid services to customers pay for calls in advance.

It's a sign of the traction prepaid players are getting. Tracfone's AT&T plan appeals to extreme budget customers, said Moffett.


Analysts were far less impressed with AT&T's landline business. The company's enterprise revenue declined 10.4 percent and overall landline revenue fell 7 percent, reflecting budget constraints and job cuts in the corporate world.

The declines also point to the continued trend of households disconnecting their home phone lines in favor of wireless or cable services.

Wireless was a little bit better than expected. Wireline was a little worse than expected. All in all a mixed bag quarter, said Stifel Nicolaus analyst Chris King.

Overall, earnings totaled $3.2 billion, or 54 cents a share, compared with profit of $3.2 billion, or 55 cents a share, in the period a year ago. Analysts had expected it to post earnings of 50 cents a share.

Revenue fell 1.6 percent to $30.9 billion, the company said, which was in line with the average analyst estimates of analysts polled by Thomson Reuters I/B/E/S.

While high iPhone activations have depressed wireless profit margins in previous quarters, AT&T said that fewer customer cancellations and improvements in operating efficiencies in network and support systems helped it offset the iPhone costs this time around.

Its wireless operating profit margin was 24.6 percent in the third quarter compared with 18.9 percent in the year-ago quarter and 23.8 percent in the second quarter.

The company is also depending on services such as high-speed Internet and its U-Verse television service for growth. It added 240,000 U-Verse customers, bringing its total to 1.8 million.

Shares of AT&T climbed 1.6 percent to $26.35 in early trade on the New York Stock Exchange.

(Reporting by Sinead Carew in Chicago and Paul Thomasch in New York; Editing by Derek Caney)