By PETER SVENSSON
NEW YORK -- AT&T on Tuesday said that it saw declining smartphone sales in the second quarter, leading to the best profitability ever in its wireless arm as it saves on phone subsidies.
The largest telecommunications company in the U.S. says it activated 5.1 million smartphones in its latest quarter, down from 5.5 million in the same period a year ago.
Much of the decline came because AT&T (T) subscribers are holding on to their phones longer: the company said the rate of upgrades to new phones was at a record low.
That's good news for the company because the company subsidizes each smartphone by hundreds of dollars to be able to sell it to customers for $99 or $199. IPhones, in particular, are expensive to sell, because Apple charges an average of around $650 for each one.
However, AT&T charges subscribers an "upgrade fee" on top of the price of the new phone. It raised that fee from $18 to $36 this year, which may have helped dampen the number of upgrades.
But tighter upgrade policies don't seem to be scaring off AT&T subscribers. They were more loyal than ever in the quarter, helping AT&T outdo analyst expectations by adding a net 320,000 subscribers on postpaid plans in the quarter.
Analysts still expect AT&T's profits to take a dive later this year, when the new iPhone comes out. In a yearly ritual, buyers flood AT&T and Apple stores, and AT&T pays dearly for the privilege of having the nation's most popular network for iPhones.
The strong wireless results helped boost Dallas-based AT&T net income rise to $3.9 billion, or 66 cents per share, for the April to June period. That's up 8.7 percent from $3.6 billion, or 60 cents per share, a year earlier.
For the latest quarter, analysts expected earnings of 63 cents per share.
Revenue edged up 0.3 percent to $31.6 billion. Analysts were expecting $31.7 billion. If it weren't for the sale of its phone-books business in May, revenue would have risen 2 percent.
AT&T sold a controlling stake in the Yellow Pages division to private-equity firm Cerberus Capital for $950 million. The unit was profitable but shrinking, and AT&T wants to be a growing company.
AT&T shares rose 19 cents to $35.57 in premarket trading. The shares are close to a three-year high of $36.21 hit three weeks ago.