Updated with new stock priceAT&T's ( T) Apple ( AAPL) iPhone success is crushing profits. The Dallas phone giant signed on 2.4 million new Apple iPhone customers, helping the company gain 1.4 million net new wireless subscribers overall in the second quarter. But the heavy expense burden of subsidizing the iPhone caused Ma Bell's operating income to fall 16% from the year-ago level. Despite the short-term drain for long-term gain from higher-paying two-year iPhone customers, AT&T posted net income of $3.2 billion or 54 cents a share, down 15% from last year but better than the 51 cent profit analysts were looking for, according to Yahoo! Finance. Sales in the quarter ended last month were $30.7 billion, down slightly from the $30.8 billion levels at the same time last year. Analysts expected $30.66 billion. The iPhone's drag on profit was flagged last week when analysts warned that the estimated $300 subsidy AT&T pays Apple would make a big dent in the company's books. In June, in anticipation of the new iPhone launch, AT&T said the additional customer acquisition costs would not hurt its operating income before depreciation and amortization, or OIBDA margins, which it targeted in the low 40% range. But the impact was much larger. Second quarter OIBDA margins dipped to 38.3% from 41.2% a year ago. And operating margin narrowed to 17.9% from 21.3% in the year-ago period. So what does this mean for investors, you might ask. AT&T already has heavy costs with the expansion of its TV effort called U-Verse, and the ongoing expenses of iPhone subsidies and wireless network construction to try and keep up with surging traffic. The outlays are required but aren't helping the company's balance sheet. AT&T's total debt has now ballooned more than 10% in the past year to $66.5 billion.
Investors view the high costs of AT&T's iPhone success as a mixed picture. Not only do iPhone customers pay more than most cell phone users, a third of them are new to AT&T, helping to push market share at a time when wireless growth is slowing. The downside, however, is that AT&T may not have the iPhone forever. Lately, louder complaints about network quality have increased speculation that AT&T could lose the iPhone to rival Verizon when the exclusive agreement expires in the second quarter of next year. Investors shrugged off the iPhone expenses Thursday. AT&T shares were up 3.1% to $25.61 in recent trading.