Published: Thursday, 23 Jul 2009 | 11:21 AM ET

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AT&T Thursday reported a smaller-than-expected drop in quarterly profit and strong sales of Apple's iPhone, which brought new customers to the carrier but hurt its mobile profit margin.

The results, which sent AT&T shares up 1.65 percent, underscored the importance of the Apple

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[AAPL  Loading...      ()   ] relationship to the No.2 U.S. wireless service, which heavily subsidizes the cost of the iPhone in order to attract new subscribers.

AT&T

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[ATT  Loading...      ()   ] added 1.4 million net subscribers in the second quarter including 1.2 million retail monthly bill-paying customers. Six analysts surveyed by Reuters had, on average, expected 1.08 million subscriber additions.

The company activated more than 2.4 million iPhones in the quarter and more than a third of these were new customers.

"The results were very good," said JPMorgan analyst Michael McCormack, but he said that the iPhone's effect on margins was a concern for AT&T, as well as corporate spending. Analysts have raised worries about AT&T's dependence on the iPhone for growth, because of reports that its exclusive U.S. rights to sell the phone expires next year.

Toby Jorrin / AP AT&T Communications corporate offices in San Antonio.

AT&T said costs related subsidies for the iPhone had pushed its wireless margin for operating income before depreciation and amortization down to 38.3 percent from over 40 percent.

It reiterated a long-term goal for margins in a mid-40 percent range, but did not repeat its target announced in June for 2009 margins in a "low 40 percent range."

"For the stock, the key is going to be commentary for the outlook for the second half of the year. The key is how long the iPhone dilution continues on the margins and when business trends recover," said McCormack.

Profit was $3.2 billion, or 54 cents per share, compared with $3.77 billion, or 63 cents per share, in the same quarter a year earlier. This beat the average analyst estimate for earnings of 51 cents per share, according to Reuters Estimates.

AT&T said its better than expected profit was helped by a lower tax rate.

Revenue fell 0.45 percent to $30.73 billion, and compared with the average analyst expectation for $30.64 billion. The company said the June 19 launch date of the latest iPhone 3GS was the best sales day ever for AT&T retail stores and its online store. It said increased operating expenses reflected costs related to the success of the launch of iPhone 3GS.

Commresearch analyst Gregory Lundberg estimated that excluding iPhone, 25 percent fewer people signed up for AT&T's service in the second quarter compared with the first quarter.

"Some of that's seasonal, some of it is the market, but it really puts a magnifying glass on the risk of losing the iPhone exclusivity," Lundberg said.

JPMorgan's McCormack said investors expect continued strength in iPhone sales in the current quarter, which would also mean continued pressure on wireless profits.

"Until we see ... margins improve to the 40 percent range, people will continue to question the value of the iPhone relationship," he said.

Its shares rose to $26.09 on the New York Stock Exchange, from their Wednesday close of $24.84.

"The US wireless market really looks like it’s close to saturation," Chandan Sarkar, managing director at Aurlga USA, told CNBC after the results.

Because the cell-phone market is near saturation, with around 90 percent of the US population already owning one, Sarkar expected this quarter’s earnings to show weakness, he told CNBC.

Sarkar told CNBC he was surprised how well AT&T did on the wireless side of its business.

- CNBC.com contributed to this report.

(CORRECTION: An earlier version of this story provided an adjusted earnings per share figure instead of a net income earnings per share figure for the year-ago period.)

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