AT&T Inc posted a smaller-than-expected drop in quarterly profit on strong subscriber growth for its video and high-speed Internet service, as well as improved margins for its wireless service.

Subsidies for Apple Inc's iPhone had cost AT&T dearly in recent quarters, but analysts said the partnership is now starting to help rather than hurt profits as users of the touch-screen phone spend heavily on data services.

AT&T shares rose nearly 4 percent in morning trading as analysts said the biggest U.S. phone company had reported impressive results given the weak economy.

You had broadband net adds very strong, U-verse (video service) net adds very strong and wireless was very strong, said Commresearch analyst Gregory Lundberg. For this economy, it was an outstanding performance.

AT&T's first-quarter profit fell to $3.13 billion, or 53 cents per share, from $3.46 billion, or 57 cents a share, a year earlier. Analysts on average were expecting 48 cents per share, according to Reuters Estimates.

Revenue edged down 0.6 percent to $30.57 billion, which was below the analysts' average forecast of $31.06 billion, but investors were pleased with AT&T's performance in its growth markets, including its U-verse service.

AT&T said it had added 284,000 U-verse subscribers in the first quarter, giving it a total subscriber base of 1.3 million. U-verse competes with cable TV providers such as Comcast Corp and satellite providers such as DirecTV .

U-verse additions were ahead of three analysts' estimates that ranged from 240,000 to 281,500, and above the service's fourth-quarter additions of 264,000 subscribers.

AT&T said it had added 359,000 broadband Internet subscribers, well ahead of Lundberg's forecast of 225,000 additions.

IPHONE BOOSTS WIRELESS

The company added 1.2 million net cell phone customers in the quarter, in line with analyst expectations. It trails Verizon Wireless, owned by Verizon Communications and Vodafone , in mobile phone customers.

AT&T said 1.6 million Apple iPhone customers had activated services on the AT&T network during the quarter, more than 40 percent of which were new to the telephone operator.

The base of iPhone customers is now large enough to offset the subsidies for new iPhone users, said Bernstein analyst Craig Moffett.

AT&T reported wireless profit margin of 40.9 percent, above the 39.2 percent forecast by Moffett.

But other analysts worried that AT&T, currently the exclusive U.S. provider for the iPhone, was depending too heavily on one device as they estimated about three-quarters of its net new monthly bill-paying customers were iPhone users.

It's a little bit worrisome as to what happens if and when their exclusivity ends, said Stifel Nicolaus analyst Chris King. Without iPhone their net adds would be negligible.

AT&T shares were up 96 cents, or 3.8 percent, at $26.24 in morning New York Stock Exchange trade. The stock has risen about 20 percent since March 9, when it hit a 2009 low of $21.71.

(Reporting by Sinead Carew; editing by John Wallace, Derek Caney and Lisa Von Ahn)

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