AT&T Reports iPhone Failed To Connect, At Least In Terms Of Service Activations

All those long lines of first-day Apple iPhone buyers didn't immediately pay off as expected for the device's service provider, AT&T, but the company on Tuesday still reported better-than-expected earnings, aided by strong wireless growth.

The nation's largest phone company said it activated 146,000 customers for iPhone service on June 29 and 30, the quarter's last two days. IPhone sales began at 6 p.m. June 29, and AT&T T has an exclusive multiyear deal to sell iPhone service in the U.S.

The number of activations was far below many analysts' expectations, and the report sent Apple's AAPL shares plummeting 6.1%. Apple is set to release its second-quarter results at the close of regular stock market trading Wednesday.

Analysts, though, shrugged off the news as mostly a quirk of timing.

Buyers do need to activate AT&T service to use their iPhone, but analysts figure many of the early buyers didn't get that task done before quarter's end.

"I wouldn't read too much into it," said Christopher King, an analyst at Stifel Nicolaus. "IPhone activations were lighter than expected the first couple of days, but that number may have changed materially by July 2 or 3."

King estimates Apple has sold about 1 million iPhones to date, and he's sticking with his projection of 3 million unit sales in 2007.

Goldman Sachs analyst David Bailey, who projected sales of 700,000 iPhones for June 29 through July 1, says he still expects Apple to sell 5.25 million of the iPhones in 2007.

"(AT&T's) iPhone numbers appear to be lower than people expected, but it's just a question of timing," said John Hodulik, a UBS analyst. "Everything suggests that demand for the iPhone appears to be very strong."

Hodulik says early iPhone sales were held back by limited supplies in stores. But shipments appear to have improved.

AT&T said iPhone sales have been "strong" in July, but it didn't release any figures.

In a conference call with analysts Tuesday, AT&T Chief Financial Officer Rick Lindner said the "i-Phone launch went very well.

"Demand continues to be strong," he said. "The iPhone is going to provide a boost to wireless revenue going forward."

The telecom firm reported per-share profit, minus acquisition costs, of 70 cents a share, up 21% from 58 cents in the year-earlier period. Analysts expected 67 cents, based on the consensus estimate of analysts polled by Thomson Financial.

Adjusted revenue, which combines sales of AT&T, Cingular Wireless and BellSouth, rose 2% to $29.8 billion.

AT&T added 1.5 million wireless subscribers, bringing its total to 63.7 million.

Wireless revenue rose 12.7% to $10.4 billion. But costs to launch iPhone services squeezed wireless profit margins.

"AT&T's revenues are being driven by the wireless side," said Todd Rosenbluth, an analyst at Standard & Poor's. "Wireless margins were down. But it's money well spent as long as there are second-half benefits from the iPhone."

AT&T shares Tuesday fell a fraction.

Speculation over iPhone demand overshadowed the second-quarter results of AT&T, formerly called SBC Communications.

At CIBC World Markets, analyst Ittai Kidron sent a note to clients saying that iPhone demand, based on store checks, has slowed significantly the past 10 days.

Apple sells two versions of the music-playing iPhone, priced at $499 and $599.

IPhone expectations have fueled Apple's stock. Its shares hit an all-time high Monday of 145.22.

At Stifel Nicolaus, King says that he saw "boxes and boxes" of i- Phones when visiting an Apple store this past weekend. During the first weekend of iPhone sales, some buyers reported delays in getting service activated. AT&T says those problems were quickly resolved.

Some iPhone buyers may have tried to resell devices on eBay or Craigslist and didn't try to activate service, some analysts say. So Apple's reported sales may be higher than AT&T's activations.