iPhone sales drop but ATT and Verizon business improves

David Goldman

LAS VEGAS (CNNMoney) — A curious trend has developed in recent quarters: When iPhone sales fall, business improves for AT&T and Verizon.

The second quarter was no exception, as AT&T’s and Verizon’s combined iPhone sales fell 15% from the previous quarter … and both companies posted record high profit margins.

What gives?

Carriers pay heavy up-front subsidies to bring the cost of most smartphones down to $200 for their customers. Apple commands the highest subsidies for the iPhone. Since many potential iPhone customers are now in a holding pattern, waiting for the next iPhone to debut, iPhone sales have steadily declined since last fall.

As iPhone sales slump, the amount of money AT&T and Verizon pay Apple up front has fallen, improving their margins.

AT&T said Tuesday that it activated 3.7 million iPhones during the second quarter, down from 4.3 million in the first quarter. Ma Bell activated 9.4 million when the iPhone 4S first went on sale in the fourth quarter of 2011.

This follows Verizon’s announcement last week that it had sold 2.7 million iPhones this past quarter. That’s down from 3.2 million in the first quarter and 4.2 million in the fourth quarter of last year.

Accordingly, Verizon’s wireless margins rose to 49%, from 46% in the previous quarter and 42% in the fourth quarter of 2011. AT&T’s wireless margins were 45%, up from 42% in the first quarter and 38% in the fourth quarter.

Both carriers’ wireless profit margins soared past Wall Street analysts’ expectations. AT&T even topped higher expectations, as analysts revised their forecasts following Verizon’s stellar quarter.

But telecom analysts think that trend is about to reverse course. With a highly anticipated 4G-LTE iPhone expected to launch in October, wireless margins will probably plummet in the fourth quarter.

“We forecast a large drop-off in margins in the fourth quarter as a result of the expected launch of an iconic LTE device,” said Kevin Smithen, analyst at Macquarie.

Apple is set to reveal its quarterly financial report, including its iPhone sales numbers, after the market closes on Tuesday. The tech giant gave a slightly disappointing iPhone outlook in April, suggesting that it would likely sell fewer smartphones in the second quarter than it did in the first quarter.

In the first quarter, AT&T and Verizon both reported lower than expected iPhone activations, but Apple soared past sales forecasts due to a strong launch in China. This past quarter, however, there were no significant iPhone launches globally.

Both Verizon and AT&T gained steam, as the number of smartphone users grew. Smartphone customers pay more for their service, helping to boost carriers’ key “average revenue per user” metric. Verizon’s ARPU rose 4% year-over-year to a record $56.13. AT&T’s ARPU rose 2% to $64.93.

Overall, the news was slightly better for Verizon than for AT&T in some key areas. Verizon added 888,000 wireless customers under contract, compared to just 320,000 for AT&T.

Verizon reported a profit of $4.3 billion, up 19% from last year. Its sales totaled $28.6 billion, up 4%.

AT&T said its earnings for the second quarter were $3.9 billion, up 9% from last year. Revenue clocked in at $31.2 billion, essentially flat with year-ago results.

Sprint, the third nationwide iPhone provider, is expected to give its quarterly financial report on Wednesday.

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