MetroPCS Communications Inc
lost more than a third of its market value on Tuesday after it reported quarterly earnings that missed Wall Street expectations and warned that already-weak second-quarter subscriber numbers would worsen in the current quarter.

MetroPCS, a provider of wireless services to cost-conscious consumers, said it was having a tough time holding on to its customers, who are particularly vulnerable in a weak economy.

Still, the company said it planned to boost network spending to support heavy data use by some customers.

MetroPCS shares closed down 37 percent, near their session low, and its market capitalization fell to about $3.68 billion from $5.8 billion after the news. The shares of rival Leap Wireless International Inc dropped 21 percent, also near their session low, as investors worried it would also report weak results, on Wednesday.

MetroPCS's larger rivals include Sprint Nextel Corp and T-Mobile USA, the customer-losing Deutsche Telekom unit that is seeking approval to be bought by U.S. No. 2 service AT&T Inc.

MetroPCS reported a net 198,810 new customers in the second quarter, short of the 248,400 average forecast of five analysts surveyed by Reuters.

MetroPCS said its customer defection rate, also known as churn, rose to 3.9 percent in the second quarter from 3.3 percent in the year-ago quarter and it warned that churn would likely rise this quarter.

Because MetroPCS does not require long-term contracts for its unlimited-use wireless service customers can drop its service more easily in any given month.

Executives told analysts on a conference call that they saw no signs of economic improvement in their operating markets.

People are just struggling to get by, Chief Operating Officer Tom Keys said.

The company also noted that U.S. government-subsidized cellphone programs such as Assurance Wireless -- which offers consumers a free phone and 250 minutes of free calls per month -- were drawing away customers, particularly in markets where the program had launched within the last three to five months.

Sprint Nextel's Virgin mobile unit provides the Assurance service among its prepaid service options.

On top of these issues, MetroPCS's own bet that selling expensive smartphones would boost revenue appears to be failing, Credit Suisse analyst Jonathan Chaplin said.

Smartphones aren't having the benefit people hoped for and the cost of supporting smartphones might be higher than expected, Chaplin said. It's probably still the fastest growing wireless business in the market, but expectations have definitely come down.

CAPITAL SPENDING BOOSTED

MetroPCS said the cost of attracting new customers rose about 8 percent compared with the year-ago quarter as it fought a seasonal slowdown and economic pressure. Sprint Nextel complained of higher costs last week.

While such dramatic stock declines could make MetroPCS and Leap into attractive takeover targets, the most strategic buyers may not be in a position to buy either, analysts said. Sprint Nextel, which is seen as the most likely suitor, is also struggling to fight intensifying competition.

Credit Suisse's Chaplin expressed concern that MetroPCS had raised its capital spending target for 2011.

The company said it now expected capital spending of $900 million to $1 billion for the year, up from its previous budget of $700 million to $900 million announced in May, as heavy use of data services was putting pressure on its wireless network.

It's a challenge, Chief Executive Roger Linquist told analysts on the conference call.

The company helped to boost revenue in the last several quarters by selling advanced phones based on Google Inc's Android software. But these customers are heavy data users and cost a lot to support.

One large shareholder that recently trimmed its MetroPCS holdings considers MetroPCS is still a very strong long-term investment because of its niche prepaid market and its prospects for growth in high-speed wireless services.

It's almost like they're in a rip tide momentarily, said a representative for the shareholder who asked not to be named, because the person was not authorized to speak to the press. We've got to look at it hard, the person said, but added, We don't think that something fundamentally has changed at the business.

Profit rose to $84.3 million, or 23 cents per share, from $79.9 million, or 22 cents per share, a year earlier.

Excluding unusual items, earnings would have been 24 cents per share, compared with the average analyst forecast of 29 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose 19 percent to $1.21 billion from $1.01 billion, compared with the average Wall Street forecast of $1.23 billion.

MetroPCS shares closed off $5.92, or 37 percent, at $10.26 on the New York Stock Exchange, while Leap shares fell $2.73, or 21 percent, to finish at $10.27 on Nasdaq.

(Additional reporting by Supantha Mukherjee in Bangalore; Editing by Andre Grenon, Gary Hill)