iPhone News Updated

AT&T 2Q Net Down Despite IPhone Strength >T

AT&T Inc.’s (T) second-quarter profit fell 15% as more customers opted to cut their cords, with many of them opting to go solely with a cellphone such as the iPhone.

Apple Inc.’s (AAPL) smartphone again buoyed the company’s results, helped in particular by the quarter’s launch of the iPhone 3GS. AT&T activated 2.4 million iPhones as consumers seek to do more with their cellphones than just talk or text message.

“That shows the massive shift away from voice-centric phones to data-centric integrated devices,” said Roger Entner, head of telecom research at Nielson Co. “People want to have more than just voice, and they want to do it with AT&T.”

The company posted income of $3.2 billion, or 54 cents a share, down from $3.77 billion, or 63 cents a share, a year earlier. The latest results included 5 cents in increased pension expenses.

Revenue slipped 0.4% to $30.73 billion.

Analysts polled by Thomson Reuters expected earnings of 51 cents on revenue of $30.67 billion.

AT&T shares recently rose 4.2% to $25.87.

The surprisingly strong earnings, however, were a bit deceptive, according to Goldman Sachs analyst Jason Armstrong. They were helped by a lower tax rate, which allowed the company to top expectations, he said.

The subsidy AT&T pays to keep the iPhone priced so low hurt the company’s wireless profitability. Service margins were at 38.3%, but Chief Financial Officer Rick Lindner said continued cost cuts could boost it to the mid-40s range in the next few years.

Entner estimates that the carrier paid Apple roughly $720 million based on the 2.4 million iPhone activations. Over the next two years, those customers will yield roughly $5.5 billion in revenue.

As a result, the subsidy is a cost that AT&T willingly absorbs. The iPhone has kept the carrier’s wireless growth humming despite increased competition from low-end discount wireless service providers as well as chief rival Verizon Wireless, which is jointly owned by Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD). As a result, AT&T enjoys higher margins down the line because iPhone subscribers are required to sign a two-year contract for a pricey service plan. The carrier also sees lower turnover as it has the sole rights to the device in the U.S.

AT&T’s wireless business saw profits rise 2.7% on a 10% gain in revenue in the second quarter. The turnover rate for contract customers fell to a low of 1.09%. It added 1.2 million subscribers, two-thirds of whom signed up for an iPhone, illustrating the carrier’s reliance on Apple.

AT&T’s wireline business, meanwhile, saw income fall 27.5% as revenue fell 6.1% amid a continued deterioration of its landline business.

Its enterprise business, which provides services to large corporations and government agencies, also fell as a result of the continued weak spending environment.

“Business trends continue to erode with no evidence of stabilization,” said Mike McCormack, an analyst at J.P. Morgan.

AT&T isn’t planning for an economic recovery or a rebound in business spending this year, Lindner said.

The company did post relatively strong subscriber additions in the high-speed Internet business, with 112,000 new lines, more than double a year ago. The period is typically weaker since students disconnect their lines before going home for the summer.

AT&T also added 248,000 U-Verse TV subscribers in the period. The company is relying on its own television service - as well as a partnership with DirecTV Group Inc. (DTV) - in an effort to stave off competition from cable providers, who can offer a similar “triple play” of phone, Internet and video services.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

[Thanks: http://online.wsj.com]

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