By Sam Oliver

Published: 10:00 AM EST (07:00 AM PST)

AT&T said Wednesday that third quarter sales were boosted by a larger than expected number of iPhone 3G activations, resulting in long-term value at the expense of near-term profits.

The exclusive US iPhone carrier saw profits rise 5.5 percent to $3.23 billion, or 55 cents a share, up from $3.06 billion, or 50 cents a share during the year ago quarter.

AT&T netted 2 million new subscribers during the quarter to end with 74.9 million. The growth was driven largely by activations of 2.4 million iPhone 3Gs, 40 percent of which went to wireless customers who were new to the carrier's network.

"I am particularly pleased with the customer response to the iPhone 3G," said AT&T chief executive Randall Stephenson. "The new customers we're winning are high-value, with attractive revenue and churn profiles."

Specifically, the carrier said iPhone subscribers generate ARPUs (average monthly revenues per subscriber) that are approximately 1.6 times higher -- with churn rates 'significantly lower' -- than the company's overall postpaid subscriber base.

Overall, more than two-thirds of AT&T's postpaid net adds during the quarter came from customers choosing an integrated device like the iPhone, and 22.0 percent of postpaid wireless subscribers now have a similar device, up from 10.5 percent one year earlier.

As a result, AT&T saw wireless data revenues grow 50.5 percent versus the year-earlier quarter to $2.7 billion, reflecting strong increases in areas such as Internet access, messaging, e-mail and related services. Wireless Internet access revenues more than doubled while multimedia message volumes were also up more than twofold versus the third-quarter of 2007.

The boost from iPhone did not come without a cost, however. AT&T, which is fronting hefty discounts on each of the Apple handsets sold, said those subsidies helped reduce pretax third-quarter earnings by approximately $900 million or $0.10 per share. The carrier was also hit with approximately $145 million, or $0.02 per share, in hurricane-related expenses.

Without the iPhone and hurricane impacts, AT&T's third-quarter wireless operating income before depreciation and amortization (OIBDA) service margin would have been approximately 42 percent.

Based on third-quarter customer response, AT&T said it's optimistic regarding continued strong iPhone 3G activations and is confident in the long-term value created by its investment in acquiring high-value, data-centric wireless subscribers.

In fact, the carrier indicated that iPhone 3G sales are flowing at a higher-than-expected rate, and as a result now expects its dilution associated with the touch-screen handset will run above its previous expectation. The company now expects its full-year 2008 wireless service OIBDA margin to be better than 37 percent versus its previous outlook of 39 percent to 40 percent. It also expects its full-year adjusted consolidated operating income margin to be approximately 23 percent versus its previous outlook of approximately 24 percent.

"We're expanding the market, as users adopt more data and media-rich services and access a wide array of applications," Stephenson said. "These achievements are positive for the future of our business."

On Tuesday, Apple announced that it sold nearly 6.9 million iPhone 3Gs worldwide during the same three-month period.