Here’s Why Apple Isn’t Happy With AT&T’s First Quarter

AT&T (NYSE:T) beat analysts’ estimates for first-quarter profit as iPhone sales declined, boosting margins compared to the fourth quarter when the company and its rivals were weighed down by the costs of subsidizing new iPhones for contract customers.

Shares of AT&T rose 1.5 percent Tuesday morning on the news. Though fewer iPhone sales meant weaker subscriber growth for AT&T, it did reduce the amount of cash it had to pay to Apple (NASDAQ:AAPL), improving profit margins.

Piper Jaffray analyst Christopher Larsen said AT&T’s wireless margin of 41.6 percent beat his expectation for 39.7 percent and was a “major driver” for the telecom. The margin, based on earnings before interest, tax, depreciation, and amortization, was 28.7 percent in the fourth quarter and 39 percent in the year-earlier quarter.

“One of the big things is they didn’t have such a big iPhone refresh,” said Larsen. That means iPhone users maintained their lucrative data plans, but didn’t upgrade to the new iPhone, which hurts AT&T margins because an existing customer does not necessarily increase his or her spending when upgrading phones, but a new customer will automatically boost revenue.

AT&T activated 4.3 million iPhones in the first quarter, down from 7.6 million in the fourth quarter when the new iPhone 4S was released. Verizon Wireless (NYSE:VZ) sold 3.2 million iPhones in the latest quarter.

Net income rose 5.2 percent to $3.58 billion, or 60 cents a share, from $3.41 billion, or 57 cents a share, in the year-ago period. Bloomberg and Thomson Reuters I/B/E/S analysts had expected 57 cents per share. Consolidated revenue rose from $31.25 billion to $31.8 billion.

That’s despite relatively slow customer gains, with AT&T adding 187,000 new mobile users in a quarter in which its biggest rival, Verizon, added 501,000. AT&T added 717,000 customers in the fourth quarter.