July 29 (Bloomberg) -- Sprint Nextel Corp., the third- largest U.S. mobile-phone company, reported a wider loss than analysts projected as new devices failed to win customers away from AT&T Inc.’s iPhone. The stock fell the most in four months.

The net loss widened to $384 million, or 13 cents a share, Sprint said in a statement today. Analysts projected a loss of 9 cents, according to the average of 11 estimates compiled by Bloomberg. Sales fell 10 percent.

Chief Executive Officer Dan Hesse is banking on more advanced devices such as the Pre from Palm Inc. to attract users who browse the Web, send e-mail and pay higher monthly bills. Sprint lost 257,000 customers as a gain in less lucrative prepaid users failed to overcome contract-subscriber defections.

“They’ve got a long road to recovery,” said Michael Nelson, an analyst at Soleil Securities/Nelson Alpha Research in New York. He advises investors to hold the shares and doesn’t own any. “Ideally, they would like to improve the postpaid side of the business, as that’s a more profitable segment, but the company is still facing more significant challenges.”

Sprint fell 54 cents, or 12 percent, to $4.05 in New York Stock Exchange composite trading at 4 p.m., the biggest drop since March 16. The stock has more than doubled this year.

Subscriber Losses

The company lost 991,000 contract subscribers in the period. Nelson forecast contract-customer losses of 1 million. Sprint added 777,000 contract-free lines, helped by its Boost Mobile unlimited prepaid service.

The year-earlier loss was $344 million, or 12 cents a share. Sales fell to $8.14 billion, compared with the average $8.13 billion estimate in a Bloomberg survey.

Last month, Sprint started offering the Pre, challenging the iPhone in the market for so-called smart phones that surf the Web, play videos and download applications. Contract customers paid more than $15.50 a month on average to use their phones’ data features, helping offset declines in voice calls.

The Pre, like all phones that customers buy with a service contract, will take several months to start making money, Hesse said today in an interview. Sprint subsidizes phones to get customers to sign up for two-year contracts and spends money on marketing to attract users for new devices.

AT&T, Verizon Gains

Yesterday, Sprint agreed to buy out Virgin Mobile USA Inc. for about $420 million in stock to gain more customers for its prepaid unit. That strategy may be risky because of the lower prices and higher customer turnover of that market, said Chris King, an analyst at Stifel Nicolaus & Co.

Contract customers paid an average monthly bill of $56 in the second quarter, while prepaid bills were $34. Customer turnover, or churn, for contract subscribers was 2.1 percent, while Boost’s churn was 6.4 percent.

While there’s a debate in the industry about whether the surge in prepaid-customer growth will continue after the economy recovers, contract-free phone service has become too popular to ignore, Hesse said.

“The prepaid segment of the wireless market is growing at a faster rate than postpaid is,” he said. “We want to make sure we have a strong offering.”

The Boost Unlimited service is offered on the iDEN network, which Sprint got in its 2005 purchase of Nextel Communications Inc. The acquisition led to customer complaints about call quality and millions of defections as Sprint struggled to integrate Nextel to its own operations. That freed up capacity for the $50 unlimited calling plans.

Sprint wrote down most of the acquisition’s value in 2007, leading to almost $30 billion in losses. In January, Sprint said it would cut 8,000 jobs in a bid to return to profit.

AT&T, the exclusive U.S. carrier for Apple Inc.’s iPhone, last week posted second-quarter earnings that beat analysts’ estimates. The second-largest U.S. wireless carrier gained 1.2 million contract customers and activated more than 2.4 million iPhones in the period. Verizon Wireless, the biggest, added 1.1 million customers last quarter.

To contact the reporters on this story: Amy Thomson in New York at athomson6@bloomberg.net

Last Updated: July 29, 2009 16:10 EDT