Sprint Nextel posted second-quarter profit margins well below Wall Street estimates, sending its shares down 16 percent as the No. 3 U.S. mobile provider still lost more subscribers than expected despite spending heavily to fight off rivals.

Investors also questioned whether Sprint would meet its financial and subscriber targets for the full year after the weak results, which overshadowed Sprint's announcement of a network contract with start-up LightSquared.

Sprint's operating profit margin of 16.3 percent compared poorly with Wall Street expectations of around 19 percent as the company spent heavily to attract customers in the first full quarter when Verizon Wireless sold the Apple Inc iPhone and AT&T Inc sold a discounted iPhone.

But the bet did not pay off as Sprint still saw defections of about 101,000 net subscribers -- also known as post-paid customers -- in the quarter. This compared with analyst expectations for losses of 15,000.

Chief Financial Officer Joe Euteneuer explained that Sprint made a "conscious decision" to spend more in the second quarter so it "didn't get killed with market share."

"This was a unique quarter because of intense competition," he told analysts on Thursday on a conference call.

On top of this, the company also said the rate of customer defections would worsen in the current quarter, in line with typical trends for the third quarter.

As a result, investors questioned "whether Sprint knows what it's talking about" in keeping its target for 20011 net subscriber growth and an operating profit around the same size as 2010, Pacific Crest analyst Steve Clement said.

"People are right to be skeptical," Clement said, noting it was not clear exactly how Sprint will improve in the second half of 2011. "They didn't point to any silver bullet."

Sprint's Chief Executive Dan Hesse also noted that the company had seen improvements in subscribers in June that gave him confidence in their performance for the rest of the year.

"If we continue at the current pace of improvement we will get there. The only way we won't is if performance deteriorates," Hesse told Reuters.

However, Bernstein analyst Craig Moffett was not convinced Sprint could turn around its financials.

"Without post-paid subscriber growth, Sprint has little prospect of generating sustainable revenue growth, nor of generating sustainably rising margins," Moffett said. "On those critical dimensions, Sprint's results were a clear disappointment."

LIGHTSQUARED SKEPTICISM

Some investors were disappointed that Sprint did not outline its plans to develop a fourth-generation (4G) high-speed wireless network, and instead postponed the announcement until October.

Even news of a $9 billion network agreement with Harbinger Capital-backed LightSquared failed to comfort investors, who were skeptical about whether they would ever see the fruits of that partnership.

Instead, the LightSquared news pushed down shares in Sprint's current network partner Clearwire 17 percent as the company failed to elaborate on its future plans for how Clearwire would fit in with the LightSquared agreement.

Investors were worried the LightSquared deal would come to nothing because it was dependent on LightSquared solving difficult interference problems with key services, such as airline navigation. On top of this, it was not clear if LightSquared would be able to raise money to pay Sprint.

Hesse said investors would have to wait until October 7 to hear more about Sprint's plans as he is waiting to be able to give a clearer picture of the company's strategy.

"There are some new pieces to the puzzle that were unanticipated that will add strength and color to the story if we wait a little longer," Hesse said without giving details.

Stifel Nicolaus analyst Christopher King was unimpressed.

"They had promised a mid-year announcement with respect to 4G. If (LightSquared) is their 4G plan, they don't have a plan," King said.

Meanwhile, Sprint's biggest rival Verizon Wireless added 1.3 million subscribers in the second quarter, while AT&T, the No 2 U.S. mobile service, added 331,000 subscribers.

Sprint's loss widened to $847 million, or 28 cents per share, from $760 million, or 25 cents a share, a year earlier.

Before items such as losses from its investment in Clearwire, Sprint's quarterly loss per share was 6 cents, better than analyst expectations for 12 cents, according to Thomson Reuters I/B/E/S.

Net operating revenue rose to $8.31 billion from $8.03 billion. Sprint shares were

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