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

While AT&T faces home phone disconnections and a drop in business spending that led it to forecast a small drop in 2009 revenue on Thursday, strength in mobile is offsetting much of the pain. Shares climbed 1.5 percent.

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.

While Apple Inc's iPhone is paying big dividends, some investors worry about AT&T's increasing dependency on it because its exclusive U.S. rights to sell iPhone is expected to expire next year.

But AT&T noted that the iPhone only accounted for about a third of new monthly-bill paying customers in the quarter.

We have a legacy of having a great portfolio or products. We know that's going to continue after the iPhone is no longer exclusive to us, AT&T's mobile chief Ralph de la Vega said on a conference call with analysts.

AT&T, the first major U.S. mobile operator to issue results for the last quarter, reported 3.2 million iPhone activations for the period, more than expected. That helped it attract 2 million net new customers -- a third more than analysts had forecast -- with a big chunk of those being the valuable monthly-bill paying subscribers.

Aside from the iPhone surprise, Moffett said much of AT&T's customer growth was from Tracfone, an America Movil unit that uses AT&T's network to sell prepaid services.

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

Stifel Nicolaus analyst Chris King said AT&T's growth likely means the No. 2 U.S. mobile service took customers from bigger rival Verizon Wireless, a Verizon Communications and Vodafone Group Plc venture, and from Sprint Nextel . Verizon reports on October 26. and Sprint reports Oct 29.


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.

Chief Financial Officer Rick Lindner told analysts that the enterprise segment would improve over time.

In business, which is probably the most challenged right now, again we feel very good about how we're positioned and we know it's going to improve as the economy improves, he said.

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

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

While iPhone activations have depressed wireless profit margins in the past, AT&T said fewer customer cancellations and operational improvements helped it post an operating margin of 24.6 percent, up from 23.8 percent in the second quarter.

AT&T is also looking high-speed Internet and its U-Verse television service for growth. It added 240,000 U-Verse customers in the quarter, bringing its total to 1.8 million.

Its results come on the same day the U.S. Federal Communications Commission staff recommended a controversial proposal for new Internet rules aimed at preventing operators from favoring some content providers over others on wired and wireless networks.

Operators have loudly protested the proposal, which would not become final until next year, saying it would impede telecom investment. In his keynote speech at a Chicago trade show, AT&T's operations chief John Stankey said the proposal made him feel like he was going to a funeral.

I know something sad's about to happen here, he said.

Shares of AT&T climbed 0.5 percent to $26.08 early Thursday afternoon on the New York Stock Exchange.

(Reporting by Sinead Carew in Chicago and Paul Thomasch in New

York; Editing by Derek Caney and Richard Chang)