NEW YORK (Dow Jones) – Sprint Nextel Corp. (S) posted a narrower fourth-quarter loss but faced increasing competition for wireless customers who pay in advance for service, as competitors cut their prices during the holidays.

The Overland Park, Kan., wireless carrier, however, showed some progress in reducing the number of its more lucrative contract customers that left in the period. A majority of the defections came from the Nextel end, while the Sprint side added customers for the first time in a year and a half.

“The company is showing slow and steady progress,” said Philip Cuscik, an analyst at Macquarie Securities.

However, Sprint’s pre-paid business–which are generally cheaper plans that don’t offer long-term service contracts–has been the company’s primary growth engine, with Sprint going as far as acquiring Virgin Mobile USA to broaden its reach of consumers. Over the past year, the business, primarily driven by its Boost Mobile line, has made up for staggering losses among post-paid customers, or those committed to long-term contracts.

Sprint shares were off 7.9% to $3.36 as a result of the disappointing pre-paid business and disappointing financial results.

The nation’s third-largest wireless provider reported a loss of $980 million, or 34 cents a share, compared with a year-earlier loss of $1.62 billion, or 57 cents. Fourth-quarter results included a one-time charge of nearly 11 cents a share from deferred taxes, while year-earlier figures included a $1 billion write-down. Analysts, on average, had projected a loss of 19 cents a share.

Revenue fell 6.7% to $7.87 billion, below the average estimate of $8.04 billion.

Boost Mobile saw tremendous success over the past year through its unlimited $50-a-month plan., but it faced increasing pressure in the fourth quarter as Tracfone Wireless, a unit of America Movil S.A.B. de C.V. (AMX), expanded its less expensive Straight Talk service through Wal-Mart Stores Inc. (WMT). The service is powered by Verizon Wireless, a unit of Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD).

At the same time, MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) cut their prices in the fourth quarter, and both are committed to maintaining the most affordable option.

“There’s no question the industry is getting more competitive,” Chief Executive Dan Hesse said.

For the quarter, Sprint added 435,000 pre-paid customers and lost 504,000 post-paid subscribers.

The company may increase the number of pre-paid brands in the second half to target specific segments. Sprint already runs Boost, Virgin Mobile and a recently launched low-income offering called Assurance Wireless. The strategy should help the company regain momentum later in the year as it works through the integration of Virgin Mobile, Hesse said.

Sprint’s post-paid business clawed its way back to growth as a result of its “Any Time, Any Mobile” unlimited mobile-to-mobile phone plan and an improved selection of smartphones. Industry observers are more interested in how the post-paid business fares in 2010. Last month, Verizon Wireless and AT&T cut their unlimited calling plans to $70 a month, narrowing Sprint’s price advantage. Hesse said he was content with the current prices.

“I’m encouraged with the post-paid progress,” said William Power, analyst at Robert W. Baird & Co. “The challenge is proving they can sustain that.”

Hesse declined to comment on when the company would return to revenue and subscriber growth, only noting that the subscriber losses for the year would be less than in 2009.

The company did lose 507,000 Nextel customers in the fourth quarter with many of them likely switching to the cheaper Boost option, which runs on the same iDEN network.

Sprint showed a greater ability to keep its customers in the fourth quarter. For example, the turnover rate in the pre-paid business dropped to 5.56% from 8.2% a year ago.

On the business side, Sprint is seeing a stable start to the year after the market deteriorated in 2009.

“I’m not seeing any evidence of things getting worse or better in 2010,” he said in an interview.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

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