* Added 62,000 subs, Street expected loss of 83,000
* Q1 profit matches analyst view of 57 cents a share
* Q1 Rev $31.25 bln vs Street estimate of $31.26 bln
* Shares down 0.6 percent (Adds executive quote, share price update)
By Sinead Carew
The No. 2 U.S. mobile service provider, which is planning to buy T-Mobile USA, eked out a slight increase in subscribers in the first quarter, surprising Wall Street, though some analysts said the growth came at too high a cost.
Its net addition of 62,000 contract customers in the quarter was much weaker than its fourth-quarter growth of 400,000 but better than the loss of 83,000 customers expected, on average, by seven analysts polled by Reuters.
AT&T, which reported results on Tuesday, also attributed some defections to changes in network technologies for some customers that resulted from its acquisition of Alltel assets and Centennial.
But Wall Street analysts were impressed that it managed to keep customer defections in check as many feared the Verizon iPhone would send hordes of customers fleeing AT&T, which has been criticized for poor network performance.
"It doesn't look like (Verizon Wireless) decimated AT&T as many people thought they might," said Piper Jaffray analyst Christopher Larsen.
AT&T, which reduced the price of one iPhone model to $50 in the quarter, also noted that it still added 3.6 million new iPhones to its network in the quarter and that 23 percent of those customers switched from rival services.
Anticipation of the Verizon Wireless iPhone appeared to cause a lull in January sales, Chief Financial Officer Rick Lindner said, but the February launch caused much less of a ripple among AT&T customers than the company had expected.
"In February strangely we actually saw activity pick up and March was our strongest month in the quarter. We had good momentum leaving the quarter and going into the second quarter," Lindner told Reuters in a telephone interview.
As a result Lindner said he expects an improvement in subscriber growth for the rest of the year.
But AT&T's efforts to retain subscribers appeared to come at a heavy cost to profitability.
Its wireless service profit margin based on earnings before interest, taxes, depreciation and amortization dropped to 39 percent from 44.5 percent a year earlier. It also fell short of an estimate of 41.3 percent from Pacific Crest analyst Steve Clement.
"This should put concerns on iPhone (subscribers) to rest for the time being, but the margins are still a concern," Clement said.
AT&T expects margins to improve during the year, according to Lindner, but he did not give specific targets on a conference call with analysts, beyond sticking to the company's long-term target of roughly 45 percent.
AT&T earnings rose to $3.4 billion, or 57 cents a share, matching the average Wall Street estimate, according to Thomson Reuters I/B/E/S. A year earlier it posted a profit of $2.5 billion, or 41 cents per share.
Revenue rose 2.3 percent to $31.25 billion compared with analyst expectations for $31.26 billion, according to Thomson Reuters I/B/E/S. Its results came the day before the scheduled report of Verizon Communications.
AT&T is expected to surpass Verizon Wireless as the No. 1 U.S. mobile service if regulators approve its plan to buy No. 4 T-Mobile USA, a unit of Deutsche Telekom (DTEGn.DE).
AT&T shares were down 17 cents, or 0.56 percent, at $30.14 in midday trading on the New York Stock Exchange. (Editing by Derek Caney and Steve Orlofsky)