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AT&T Inc. (NYSE:T) reported better than expected second quarter earnings, riding on the high profitability from its Wireless arm. The wireless service yielded a margin of 45 percent, higher than analysts’ expectation of 42.58 percent. Overall, net sales jumped to $31.6 billion from $31.5 billion, and profits increased to $3.90 billion from $3.59 billion.

AT&T Inc. (NYSE:T) attracted 320,000 new customers during the quarter, analysts were expecting it to add 233,000 customers. But the figures are much lower when compared to 888,000 new customers added by Verizon in the same period. The company said in its official statement that all time low customer cancellation rate of  0.97 percent also helped it boost the margins. Last year, the cancellation rate was 1.15 percent in the same quarter.

Declining smartphone sales in the quarter also helped company increase margins. The telecom operators have to subsidize the smartphones by hundreds of dollars so that they can sell it to customers on discount who sign up for two year contract. Customers are reluctant on upgrading their smartphones, as they are waiting for the release of iPhone 5 which is expected to be launched in fourth quarter of this year.

Sold 5.1 Million Smartphones, Of Which 3.7 Million iPhones

The company said it sold 5.1 million smartphones during three month period, of them 22 percent were new customers to AT&T while the remaining ones upgraded their older smartphones. An astounding 73 percent of total smartphone sales was contributed by iPhones. AT&T sold 3.7 million iPhones while Verizon Wireless sold 2.7 million iPhone handsets. Verizon is more dependent on Android based smartphones.

“We executed well across the business and posted another strong quarter with growing revenues, expanding margins and double-digit earnings growth,” said Randall Stephenson, chairman and CEO of AT&T. “Our mobile Internet leadership continues, with solid gains in smartphones and tablets, plus our wireless margins have never been better. And most impressive, with this growth, we also achieved our best-ever postpaid wireless churn, which points to the premier experience customers receive on our network. All of these things add to our confidence and enthusiasm looking ahead.”

The company sold 53 percent stake in its telephone directory business to Cerberus Capital Management for $750 million in cash. The Yellow Pages business was profitable but shrinking.

AT&T’s share prices have risen 17 percent this year due to its solid performance and high dividend yield, even in uncertain economy.