Net income fell to $2.4 billion, or 41 cents a share, AT&T said today in a statement. Revenue rose 2.4 percent to $31.1 billion, close to the average analyst estimate.

Sales of Apple Inc.s iPhone 3G, the most popular phone for U.S. adults in the previous quarter, failed to counter the spending declines in the fixed-line business, where sales dropped 3.3 percent. Home-phone customers are switching off service to save money or migrating to mobile phones.

“Wireline is concerning for a lot of people,” said Jennifer Fritzsche, an analyst at Wachovia Securities Inc. in Chicago. She rates the stock “outperform” and doesnt own any. “That is pretty ugly.”

Excluding some costs, profit amounted to 64 cents a share, compared with the 65-cent average of estimates in the Bloomberg survey. The company recorded costs of 12 cents a share tied to acquisitions and 7 cents for workforce reductions. Net income a year earlier was $3.14 billion, or 51 cents.

AT&T fell 47 cents, or 1.8 percent, to $25.46 at 11:52 a.m. in New York Stock Exchange trading. The stock had lost 26 percent in the past year before today.

Outlook

Sales should grow in the “low single-digit range” this year, helped by gains in the wireless business, AT&T said. Analysts anticipate 1.5 percent growth on average, according to a Bloomberg survey. Revenue grew 4.3 percent in 2008. Earnings will be cut by 19 cents a share as the company supplements a shortfall in its pension and retiree benefits fund.

“During a very tough stretch for the economy, weve delivered solid results,” Chief Executive Officer Randall Stephenson said on a conference call. “Weve expanded our position.”

AT&T also said it will improve profitability as it subsidizes fewer iPhones and begins to reap a profit from those subscribers higher monthly bills.

AT&T cut 12,000 workers, or 4 percent of employees, last month and pledged to reduce expenditures as consumer spending dwindled. Stephenson is shifting resources from the home-phone business to faster-growing divisions such as mobile service to maintain profitability.

Data Revenue

Wireless-service sales, which account for about a third of the total, climbed to $11.5 billion. The business added 2.1 million net new subscribers. That topped the 2 million estimate of Oppenheimer & Co. analyst Tim Horan and the 2.05 million forecast by J.P. Morgan Securities Inc. analyst Mike McCormack.

AT&Ts revenue from services such as Web surfing and video downloads gained 51 percent, bolstered by the iPhone 3G. Users of feature-loaded phones typically require more costly calling plans. Still, the iPhone also weighs on profitability, as AT&T sells it at a loss and tries to recoup the money later on.

“Subscriber growth comes at the expense of margins,” said Stifel Nicolaus & Co. analyst Chris King, who advises investors to buy the shares and doesnt own them. “Thats magnified, certainly, with AT&T and the iPhone in terms of the handset subsidy.”

IPhone

The company activated 1.9 million iPhone 3Gs in the period, with about 40 percent of those customers new to the carrier. The device accounted for more than a third of AT&Ts customer gains. The company paid $450 million, or 5 cents a share, to subsidize the iPhone in the quarter. AT&T covers some of the cost of the iPhone, which sells for $199, to attract more customers to its more expensive data plans.

Contract customers paid an average of $59.59 a month, up 3.9 percent from a year earlier, the Dallas-based company said. That beat Kings $57 forecast.

AT&T has exclusive rights to sell the iPhone in the U.S., and introduced the latest model in July. Apple said this month that it sold 4.36 million of the devices worldwide last quarter.

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