updated 7/23/2009 1:22:05 PM ET 2009-07-23T17:22:05

AT&T Inc.'s earnings fell 15 percent in the second quarter as it subsidized a record-setting launch of the newest iPhone. The weak economy also continued to sap its landline business.

The profit beat Wall Street estimates, however, and investors sent AT&T's shares up.

Cutting-edge products like the iPhone and AT&T's new cable TV service continue to do well, said Rick Lindner, AT&T's chief financial officer. But with businesses laying off workers and shutting down offices, AT&T's business services division has suffered.

"The sectors where we've seen the most impact, as you would expect, are finance, transportation and manufacturing," Lindner said.

AT&T has tried to keep pace by cutting its own costs, and reduced its employment by 6,000 workers in the quarter. That followed 8,000 cuts in the first quarter. It now has 289,000 employees.

The country's largest telecommunications provider said Thursday it earned $3.20 billion, or 54 cents per share, in the April-to-June period. That was down from $3.77 billion, or 63 cents per share, a year earlier.

Analysts polled by Thomson Reuters were expecting earnings of 51 cents per share.

Dallas-based AT&T's revenue fell 0.6 percent to $30.7 billion, matching analyst expectations.

In midday trading, AT&T shares rose 94 cents, or 3.8 percent, to $25.78. While the stock held up well in the market meltdown last fall, it has failed to keep pace with the recent recovery. AT&T has traded between $20.90 and $33.56 over the past year.

AT&T activated more than 2.4 million iPhones in the quarter, and more than a third of those were for customers who were new to the carrier. Apple Inc. and AT&T launched a new model of the phone on June 19.

AT&T, the exclusive U.S. carrier for the device, subsidizes each new iPhone by hundreds of dollars, expecting to make the money back in service fees over a two-year contract. AT&T's operating margin in wireless declined to 23.8 percent from 25.5 percent a year ago.

AT&T added a net 1.37 million wireless subscribers, a strong showing in a market that's approaching saturation, and more than analysts had expected. Together with the evident popularity of the iPhone, it could mean that AT&T has benefited at the expense of other carriers this quarter.

The popularity of the iPhone has raised questions about what would happen to AT&T if another carrier, like Verizon Wireless, were allowed to sell it as well. More than a quarter of new AT&T subscribers went for the iPhone in the quarter. At the same time, iPhone users are complaining about slow data speeds on AT&T's network, likely the result of crowding. Recent tests have shown AT&T's data speed and reliability lagging behind other major carriers.

AT&T isn't saying how long its exclusive deal with Apple extends, but Lindner sought to allay investor concerns on a conference call, pointing out that most smartphone owners are on family plans, and many other phones are paid for by employers. Both types of users are unlikely to jump to another carrier, he said.

Ovum analyst Jan Dawson questioned that assumption, saying that a carrier offering better network coverage with the iPhone might be a big lure for people, even if they're on a family plan.

"The characteristics of the iPhone are different enough and people's behavior associated with the iPhone is different enough that the usual rules don't apply," Dawson said.

AT&T ended the quarter with 79.6 million wireless subscribers of which just under 9 million had iPhones, according to Lindner. In terms of overall subscribers, only Verizon Wireless is bigger.

AT&T is the first major telecom company to post results for the season. Verizon Communications Inc. reports on Monday, followed by Sprint Nextel Corp. and Qwest Communications International Inc. on Wednesday.

A long-running trend continued in the second quarter as AT&T lost 921,000 residential phone lines. Households are signing up for phone service from cable TV providers or opting to rely on cell phones alone.

In the business segment, revenue fell to $10.6 billion from $11.3 billion a year ago.

AT&T said its earnings for the quarter were weighed down by pension and retiree benefit expenses that were $400 million higher, or 5 cents per share, than in the same period last year.

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