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This May 6, 2012, file photo, shows an AT&T sign at a store in New York.

CX Matiash/AP

AT&T Inc. reported a second-quarter profit on Tuesday that beat Wall Street estimates as it cut costs in its wireless business by slowing upgrades to smartphones such as the Apple Inc. iPhone.

AT&T, the No. 2 U.S. wireless provider, reported better-than-expected wireless profit margins because it reduced the amount of subsidies it paid for devices including the iPhone by forcing customers to wait longer before upgrading.

It posted a wireless service margin of 45 per cent, based on earnings before interest, taxes, depreciation and amortization. This was well ahead of the average expectation of 42.56 per cent from five analysts.

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"It was a very strong quarter driven by policies the company put in place on the wireless side," Piper Jaffray analyst Christopher Larsen said.

AT&T and its rivals Verizon Wireless and Sprint Nextel have been curtailing upgrades in an effort to reduce their costs for subsidies paid to Apple. They shoulder a hefty portion of the phone's cost to give a discount to customers who commit to a two-year contract.

AT&T said roughly 6 per cent of its subscribers upgraded their phones in the second quarter, compared with about 7 per cent in the first quarter.

AT&T was also likely helped in the second quarter as customers may be putting off buying phones until the next iPhone launch, which is expected in the fourth quarter.

Piper's Larsen said that while he expects strong wireless margins to continue into the current three-month term, they will likely subside in the fourth quarter.

"I do expect a lot of this to reverse in the fourth quarter because of the expected iPhone refresh," Mr. Larsen said.

AT&T's profit rose to $3.90-billion (U.S.), or 66 cents per share, from $3.59-billion, or 60 cents per share, a year earlier. The result beat Wall Street expectations of 63 cents per share, according to Thomson Reuters I/B/E/S.

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The company added 320,000 contract customers in the second quarter, ahead of the average expectation of about 233,000 from six analysts contacted by Reuters. However, it was well behind the 888,000 net subscribers bigger rival Verizon Wireless added.

AT&T said it was helped by a record low 0.97 per cent customer cancellation rate, known in the industry as churn, compared with 1.15 per cent in the year-ago quarter.

Hudson Square analyst Todd Rethemeier noted AT&T's profit margin of 32.3 per cent for its traditional wireline business was above his 31.8 per cent estimate.

The company also said it saw an increase in the number of customers who moved from its unlimited data service plans to its tiered plans, under which customers are charged based on how much data they download.

According to AT&T, about 27 million people, or two-thirds of its smartphone subscribers, are now on tiered plans, compared with 45 per cent a year ago.

The results followed AT&T's announcement last week of a new pricing structure aimed at boosting revenue and encouraging customers to connect more devices, besides phones, to its network.

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Revenue rose to $31.6-billion from $31.5-billion but fell a little short of analysts' expectations for $31.7-billion.

During the quarter, AT&T sold 53 per cent of its telephone directory business to private equity firm Cerberus Capital Management LP for $750-million in cash.

Despite the strong numbers, AT&T shares were down 55 cents or 1.5 per cent at $34.82 in morning trade on the New York Stock Exchange.

Some analysts had predicted that strong second-quarter results might fail to move AT&T's stock, which has risen about 14 per cent so far this year due to its high dividend yield and earnings and revenue stability in the face of an uncertain global economy and low U.S. Treasury interest rates.

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