Oct 24 (Reuters) - AT&T Inc posted third-quarter revenue below Wall Street estimates on Wednesday and added fewer customers than expected, citing a shortage of the latest Apple Inc iPhone.
While profit was better than estimated, analysts were disappointed with AT&T's slowing customer growth, which showed it was rapidly losing ground to bigger rival Verizon Wireless. AT&T shares fell 1 percent.
AT&T, the No. 2 U.S. mobile service provider, said it added only 151,000 net new subscribers in the quarter, compared with the average expectation for 358,000, according to five analysts contacted by Reuters.
This was dramatically slower than bigger rival Verizon Wireless, which added 1.5 million subscribers in the quarter.
"They're clearly losing signficant market share to Verizon Wireless," said Stifel Nicolaus analyst Christopher King. "It appears, based on these numbers, that Verizon Wireless is really pulling away from the rest of the industry."
AT&T blamed its weak growth on a shortage of the latest iPhone, which went on sale in the last week of the quarter. This meant that the vast majority of third-quarter iPhone sales went to existing customers, stunting growth in new customers.
The company expects iPhone supply problems to ease this quarter, helping its customer additions, Ralph de la Vega, the head of AT&T's mobile business told analysts on a conference call.
Hudson Square Research analyst Todd Rethemeier said the better-than-expected profit failed to offset his disappointment over the weak growth.
"The profitability is way up from what I thought, but it's because they didn't sell as many phones," Rethemeier said.
Slow customer growth likely helped the company post better-than-expected earnings for the quarter as each new customer comes with a hefty cost for wireless service providers.
But some analysts worried that the weaker growth should have driven the company's wireless service margin higher than its 40.8 percent, based on earnings before interest, taxes, depreciation and amortization.
"It's a somewhat troubling sign as we get into the fourth quarter, where we do expect iPhone sales to be higher," Guggenheim analyst Shing Yin said.
AT&T's profit rose to $3.64 billion, or 63 cents per share, from $3.62 billion, or 61 cents per share, and was 3 cents ahead of Wall Street expectations, according to Thomson Reuters I/B/E/S.
However, revenue fell to $31.46 billion from $31.48 billion and missed the analysts' average estimate of $31.59 billion, according to Thomson Reuters I/B/E/S.
AT&T said revenue would have been up 2.6 percent from the year-ago results, excluding its directory business, which it sold earlier this year.
Revenue for business services fell 2.6 percent in the quarter, hurt by a slowdown in government spending and an unwillingness by companies to open their purse strings due to uncertainty about tax policies, Chief Financial Officer John Stephens said.
The company raised its target for 2012 free cash flow by $2 billion to $18 billion. It also said capital spending for the year would come in at the low end of its $19 billion to $20 billion target range.
Verizon Wireless is a venture of Verizon Communications and Vodafone Group Plc.
AT&T shares fell 35 cents, or 1 percent, to $34.65 in morning trade on the New York Stock Exchange.
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