AT&T reported that its second quarter profit rose 8.7%, led by its wireless division, which had its best quarter ever, driven by the growing use of smartphones. The U.S. service provider stated that 62% of wireless customers on contracts now have smartphones, up from 50% in the prior year period. This trend results in higher revenue growth from data usage and greater rates of customer retention, and it bodes well for AT&T’s future earnings prospects.

AT&T stated that its revenue from wireless data increased 19% to $6.4 billion, while churn of postpaid customers fell to a record low 0.97%. As noted above, both gains are largely attributable to the jump in smartphone subscribers. Overall, revenue edged up 0.3% to $31.6 billion with the wireless unit contributing $16.4 billion, or more than 50% of that amount. Growth in wireless revenue was close to 5%.

Almost all the upside in AT&T’s earnings, which rose to $3.9 billion for the quarter, was driven by the wireless division. The key trend in that regard is clearly the jump in smartphone ownership among mobile subscribers, as ARPU attributable to smartphones is more than twice that of non-smartphones.

Tarifica’s Take

AT&T’s strong performance in the second quarter is encouraging not just for the company but for savvy operators worldwide. Smartphone users tend to be heavy consumers of data services, and AT&T’s profits were largely data-driven, with 39% of wireless revenue attributable to such services.

Tarifica expects that AT&T will reach an inflection point in the not-too-distant future, at which time data will pass the 50% mark in terms of total wireless revenue. When that happens, it will represent a watershed event in the transformation of mobile phones from basic devices with which to place and receive calls into full fledged computers sending and receiving large quantities of data. We have been advising operators to transition as many of their customers as possible to smartphones in order to gain the maximum benefit from this industry-changing trend. And while it is important that the changeover be accomplished as quickly as possible, operators need to be careful regarding the subsidies they provide, as higher-end devices like the iPhone carry a heavy cost that could offset some of the aforementioned benefits.

Interestingly, the growth of smartphone usage will almost certainly benefit many fixed line operators, as burgeoning mobile data traffic will ultimately have to flow through their networks. Thus, by leveraging any unused capacity they have, and by cutting deals with other network operators, fixed line service providers can also profit from the explosion of data traffic emanating from mobile devices.