AT&T Inc's earnings beat expectations on the back of strong iPhone sales, but questions over how much longer it would remain the exclusive U.S. carrier for Apple Inc dampened investor enthusiasm.

AT&T activated 2.7 mln iPhones in the first quarter, with one-third of those for customers new to the carrier, it said. It added 1.9 million wireless subscribers overall, bringing its total to 87 million.

While the iPhone helped drive profits in the quarter, many analysts saw AT&T's dependency on the smartphone as a growing vulnerability, particularly since speculation has been rampant that Apple may eventually sell iPhones through AT&T rival Verizon Wireless.

The profit beat versus consensus was really driven by the wireless margin, said Stifel Nicolaus & Company analyst Christopher King. It does not bode well for if and when they lose exclusivity.

Shares of AT&T fell 1.28 percent to $26.32 on the New York Stock Exchange early on Wednesday afternoon.

AT&T, the biggest U.S. phone company by revenue, said its first quarter profit fell to $2.5 billion from $3.1 billion a year earlier, due in part to a previously disclosed $1 billion non-cash charge related to U.S. healthcare reform.

Excluding that charge, profit would have been 59 cents a share, higher than the average analyst estimate of 54 cents a share, according to Thomson Reuters I/B/E/S.

The profit number was very impressive. It was an almost 10 percent beat, said Piper Jaffray analyst Christopher Larsen.

The iPhone was definitely a contributing factor to their improved profitability. Now that they have a large enough base of iPhone users, investors are starting to see how profitable the device is for AT&T.

AT&T added 512,000 postpaid subscribers, which are seen as the most valuable because they pay monthly bills and commit to long-term contracts. That was down from 897,000 the year before, while in line with or above most analysts' estimates.


AT&T said the increase in users of smartphones -- newer devices that allow users connect to the Internet -- helped drive wireless data revenue up 30 percent from a year earlier.

Average revenue per user among postpaid subscribers rose 4 percent from a year earlier to $61.89, and its wireless service margin was 44.5 percent, up from 42.5 percent a year earlier.

Overall quarterly revenue rose 0.3 percent from a year earlier to $30.6 billion, against the average analyst forecast of $30.7 billion.

Bernstein Research analyst Craig Moffett also raised concerns about AT&T's dependency on the iPhone.

They had 2.7 million iPhone activations, of which one-third, or 891,000, were new customers. That means that the iPhone single-handedly accounted for an extraordinary 174 percent of AT&T post-paid net additions, he said.

AT&T and Apple have not disclosed details of their relationship. AT&T CFO Rick Lindner said the company was preparing for such a change by offering a broad range of devices, such as phones that run on Google Inc's Android software.

But Lindner added that AT&T would continue selling Apple equipment, even if it decides to partner with others.

It really is Apple's decision, but at some point they will, as they have in other countries, make the decision to broaden the distribution and move to a non-exclusive arrangement, he told Reuters.

When that occurs at some point, I fully expect we'll continue to be a good partner with them, and continue to carry a full range of Apple devices.

Bernstein's Moffett said the postpaid subscriber numbers were not encouraging for other wireless carriers.

If AT&T can manage only 512,000 post-paid net adds with the iPhone, it's hard to be optimistic about anyone else's results without it, he said.

Shares in Verizon Communications Inc , which together with Vodafone Group Plc own Verizon Wireless, fell 0.3 percent to $29.67. Sprint shares slid 0.48 percent to $4.15.

Some analysts saw AT&T's 34 percent increase in wireless-related capital spending as a positive for network equipment makers, although a few said it may already be priced into the shares of companies like Cisco Systems Inc and Tellabs Inc .

(Additional reporting by Sinead Carew, editing by Tiffany Wu, Derek Caney and Richard Chang)