Although customers in the installment plan, called Next, aren't locked into traditional two-year service contracts, they pay the entire cost of phones in installments. As a result, AT&T doesn't have to pay hundreds of dollars per customer in subsidies. In return, customers can get a new phone as often as every year instead of every other year.
The company's first-quarter net income was $3.7 billion, or 70 cents per share, compared with $3.7 billion, or 67 cents, a year earlier, when AT&T had more shares outstanding. Adjusting for one-time items, including costs related to its March acquisition of Leap Wireless, income was 71 cents per share, compared with 64 cents in the same period last year. Analysts expected 70 cents.
Revenue grew 4 percent to $32.5 billion, better than the $32.4 billion analysts expected, according to FactSet.
Nonetheless, AT&T's stock fell 2.2 percent to $35.50 in after-hours trading after the release of results.
AT&T added 1,062,000 wireless subscribers in the quarter. That includes 625,000 smartphones and tablets in "post-paid" plans. These are the high-value customers on contracts or long-term installment plans. Wireless service revenue grew 2 percent to $15.4 billion. Total wireless revenue, including phones and tablets sales, grew 7 percent to $17.9 billion.
The U.S. wireless industry is undergoing a transformation as wireless carriers try to wean customers off subsidies. Subsidies had helped attract customers as the wireless industry grew, but most Americans now have cellphones.
Among new customers of post-paid smartphones and those upgrading to new devices, more than 40 percent, or about 2.9 million, signed up for the subsidy-free Next plan. That was up from 15 percent in the last three months of 2013.
Besides letting people upgrade more often once they are on Next, AT&T waived the usual wait until existing contracts are up. People were allowed to switch right away. About 1.1 million of the new Next customers came through that promotion.
AT&T also has been pushing customers into more expensive plans that offer larger amounts of data — by reducing prices at the high end.
"Customers really like the new mobility value proposition and are choosing to move off device subsidies to simpler pricing while at the same time, they are continuing to move to smartphones with larger data plans," AT&T CEO Randall Stephenson said in a statement.
In the landline business, revenue fell 0.4 percent to $14.6 billion. But its newer U-verse phone, TV and Internet service saw growth. AT&T had 634,000 additional high-speed Internet subscribers and 201,000 new TV subscribers.
AT&T raised its outlook for the year to reflect the Leap purchase. It expects revenue growth of at least 4 percent, compared with the previous guidance of 2 percent to 3 percent. It kept expectations for adjusted earnings per share the same: a percentage gain in the mid-single digit.