The No. 2 U.S. mobile provider, which is seeking approval to buy T-Mobile USA for $39 billion, added 331,000 net subscribers in the quarter, compared with the average expectation for 91,000 from seven analysts contacted by Reuters.
The net (subscriber) additions were surprisingly strong, said Mizuho analyst Michael Nelson. It seems like AT&T really successfully defended its turf after losing iPhone exclusivity.
AT&T shares were up 1.1 percent to $30.57 in Thursday afternoon trading, in line with gains for stocks generally. Nelson said the strong results could be overshadowed by investor concern about growing opposition to AT&T's controversial plan to buy T-Mobile USA.
U.S. Senator Herb Kohl, chairman of the Senate's antitrust subcommittee, urged regulators on Wednesday to block the deal and other lawmakers also expressed concern. The deal would cost AT&T about $6 billion in breakup fees if it is rejected.
AT&T said on Thursday that it still expects the deal to close in the first quarter of 2012 and that U.S. regulators reviewing the transaction are asking the questions you would expect.
Its results came a day before rival Verizon Communications
In the first quarter of this year, Verizon Wireless started selling the iPhone, ending more than three years of AT&T's exclusive rights to sell the device in the United States. While Verizon is expected to add about three times more subscribers than AT&T this quarter as a result, AT&T fared better than expected.
AT&T said the iPhone was still its strongest-selling smartphone despite the Verizon competition and that half of its customers were using smartphones by the end of the quarter, with 70 percent of its phone sales comprising the advanced phones, which command higher monthly service charges.
While wireless services have long been driving growth at AT&T, Chief Financial Officer John Stephens told analysts on a conference call that wireline revenue should start to resume growth soon even if the economy does not improve.
Whether it happens in the third quarter or the fourth quarter, we're on the cusp of it now, said Stephens, who noted that business customer trends were improving.
One wrinkle in the results appeared to be slower than expected sales of connected devices which include the Amazon.com Kindle e-reader. AT&T's 379,000 net additions of connected devices was well below an estimate for 750,000 from Pacific Crest analyst Steve Clement.
Maybe the mix shifted quite a bit to the Wi-Fi only device, said Clement. While many consumers buy e-readers with connections to cellular networks such as AT&T's so they can download books on the run, others make do with cheaper devices that only support Wi-Fi short-range networks found in homes and cafes.
This could be why Amazon announced on July 13 that AT&T would sponsor Kindles with cellular connections -- reducing the price to $139 from $189, Clement said.
AT&T said the shortfall may be seasonal after an initial flurry of purchases from consumers who received e-books around the holidays. AT&T numbers exclude customers who have not bought a book in 60 days.
AT&T's net profit fell to $3.59 billion, or 60 cents per share, from $4 billion or 67 cents per share a year earlier and compared with analyst expectations for earnings of 59 cents per share, according to Thomson Reuters I/B/E/S.
Excluding a Telmex Internacional transaction in the year-ago quarter, AT&T said earnings would have been flat.
Revenue rose 2.2 percent to $31.5 billion, compared with Wall Street expectations for $31.3 billion, according to Thomson Reuters I/B/E/S.
As well as subscriber numbers, Nelson said he was impressed with AT&T's profit margin of 41.1 percent based on earnings before interest, tax, depreciation and amortization. This compared with the analyst's expectation for 39.6 percent.
AT&T said it increased its 2011 capital spending budget to around $20 billion from its previous target of $19 billion to support increasing demand for its wireless services. T-Mobile USA is a unit of Deutsche Telekom
(Reporting by Sinead Carew; editing by Derek Caney, Matthew Lewis and Tim Dobbyn)