AT&T sales tick up on continued iPhone strength

AT&T reported a slight decline in second-quarter profit today, although revenue ticked up amid the continued strength of iPhone and other smartphone sales.

The Dallas-based telecommunications giant posted a profit of $3.6 billion, or 60 cents a share, compared with a year-earlier profit of $4 billion, or 67 cents a share. The year-ago results were helped by the sale of stock in Telmex Internacional. Excluding the Telmex asset sale, the year-over-year comparison would have been flat.

Revenue rose 2.2 percent year over year to $31.5 billion.

Analysts, on average, expected earnings of 59 cents a share and revenue of $31.31 billion, according to a survey by Thomson Reuters.

"We're encouraged by the quarter," said Todd Rosenbluth, an equity analyst for Standard & Poor's.

The carrier said it activated 3.6 million iPhones in the quarter. It was likely helped by sales of both the iPhone 4 and its cheaper $50 iPhone 3GS.

AT&T had been known as the iPhone carrier, but that exclusive run ended earlier this year when Verizon Wireless also began selling the Apple smartphone. In preparation, AT&T began diversifying its product portfolio, aggressively embracing the Android operating system this year. The company said that its non-iPhone smartphones more than doubled from a year ago. In total, the company sold 5.6 million smartphones and noted that 70 percent of the people who signed up for a service contract chose a smartphone.

The company's customer growth continues to be weighed down by its integration of Alltel and Centennial. The company added 331,000 net new contract customers, although the number jumps to 504,000 when excluding customer defections from the two acquired wireless providers. The company also added 379,000 connected devices such as tablets, e-readers and digital picture frames, an increasingly important segment of its business.

"We delivered another strong wireless quarter in a very competitive environment," Chief Financial Officer John Stephens said during a conference call this morning. "The wireless business continues to exceed expectations."

AT&T raised its forecast for full-year capital expenditures to the $20 billion range. It previously expected to be in the low-to-middle $19 billion range. The increase is likely due to its more aggressive push to deploy its 4G LTE network. The company last week unveiled its first two LTE products and plans to deploy the next-generation network in five cities this summer.

Stephens said the additional capital is being spent on "improving the customer experience" and will go into its upcoming 4G LTE network, its current network, and infrastructure to support faster service.

But the higher capital expenditures could signal longer-term implications for wireless spending and suggest that the cost to deliver service could be getting more expensive.

"I think the more interesting focus will be on capex," said Jonathan Chaplin, an analyst at Credit Suisse. "Does it just cost more to maintain networks with the amount of data that's out there?"

Stephens said AT&T is increasing its capital expenditures because it felt the financial flexibility to do so.

In addition to the financial results, many company watchers are looking for an update on AT&T's progress in seeking approval for its $39 billion acquisition of T-Mobile USA from Deutsche Telekom. Yesterday, the head of the Senate's antitrust committee spoke out against the merger, while Democratic leaders in the House also sought more scrutiny of the deal.

Wayne Watts, AT&T's general counsel, said the carrier has put together a report highlighting some of the improved efficiencies and other market benefits from the transaction.

Watts added that he is "comfortable" the deal will be approved by the first quarter. He added that opposition from members of Congress, as well as the departure of Justice Department Chief Christine Varney, will have little material impact on the process or the timing.

"We remain comfortable with the process so far and the pace that we're moving," Watts said.

Updated at 5:57 a.m. PT: with additional details on financial results. Updated at 8:03 a.m. PT: with executive comments from the conference call and analyst reaction.