Even the launch of the highly anticipated Palm Inc. (PALM) Pre couldn't prevent Sprint Nextel Corp.'s (S) most lucrative customers from packing their bags and leaving for its rivals in the second quarter.

The besieged wireless carrier continues to struggle with keeping subscribers who are willing to sign long-term contracts. It lost nearly 1 million in the period, and more than 7 million in the past two years.

Slightly offsetting the heavy losses were gains at the low end. On Tuesday, Sprint expanded its presence in the pay-as-you-go market with the acquisition of Virgin Mobile USA Inc. (VM). It's easy to see why: Sprint's own prepaid service, Boost, added 938,000 new customers in the quarter.

Defections continued to weigh on the bottom line, as the Overland Park, Kan., company reported a wider loss of $384 million, or 13 cents a share, versus a year-earlier loss of $344 million, or 12 cents a share.

Revenue retreated 10% to $8.14 billion as the carrier relies more on prepaid customers accustomed to paying less each month for wireless service.

Wall Street had forecast a loss of 2 cents, which includes one-time items (Sprint no longer provides an adjusted figure), and revenue of $8.12 billion.

Sprint shares recently fell 7% to $4.27.

"Expectations weren't good, but they delivered," said Christopher King, an analyst at Stifel Nicolaus & Co. "The guidance was unchanged. But they didn't seem to have a whole lot of confidence behind that number."

The company posted narrowed losses thanks to the debut of the Pre, which hit stores in early June. Hesse called it "the smoothest and best executed new device launch in our history."

Still, the Pre has been nagged by supply issues early on, as well as concerns that sales had slowed in the recent weeks amid criticism that Sprint hadn't provided enough marketing support. Pre customers have largely been existing Sprint subscribers, and the much-touted smartphone has yet to draw in new customers.

Sprint is working to boost the Pre inventory at third-party retailers such as Best Buy Co. (BBY), which should attract new users, Hesse said.

Also dulling the shine from Sprint's exclusive phone is Verizon Wireless' confirmation that it would offer the Pre early next year. Hesse said in an interview that he hadn't seen evidence of customers waiting until the Pre is available elsewhere before buying the device.

Verizon Wireless - which is jointly owned by Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD) - as well as AT&T Inc. (T) and its new Apple Inc. (AAPL) iPhone 3GS were the primary beneficiaries of Sprint's losses. Each added more than 1 million post-paid subscribers.

In total, Sprint posted a loss of 257,000 subscribers, weighed down by heavy losses in the post-paid and wholesale segments. The post-paid turnover rate fell to 2.05% from 2.25% in the first quarter but is still much higher than its rivals.

Prepaid was strong, indicating that its Boost brand has competed well against low-end regional players Leap Wireless International Inc. (LEAP) and MetroPCS Communications Inc. (PCS).

Wireless revenue fell 9.5%, and average monthly revenue per user, a key metric for wireless companies, was flat in the post-paid segment. Wireline revenue dropped 11% on continued voice and data declines.

Margins, meanwhile, were a source of disappointment. With significant cost cuts including cutting 8,000 jobs and closing call centers, profitability should have been better than the 21.7% posted in the second quarter, according to Goldman Sachs analyst Jason Armstrong.

The company said it continues to see full-year subscriber trends improve over a year ago, but Wall Street remains concerned as it falls further behind the market leaders.

"You'll see gradual improvement," Hesse said. "There's no silver bullet."

There remains a lag between the reality of a company with improved customer service and network performance and the poor reputation of gained from past years of neglect. Hesse has long talked about narrowing that gap but has yet to provide clarity on when it would happen.

"Patience is not one of my virtues," he said. "I'm doing what I can to accelerate it. (The slow progress) is not unexpected, but that doesn't mean it's not disappointing."

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