Sprint Nextel Corp posted a surprise quarterly profit excluding items, thanks to cost cuts and strong growth in a new service where customers pay for calls in advance, sending its shares up 12 percent.

However, the No. 3 U.S. mobile service suffered its worst ever loss of valuable monthly bill-paying customers, who sign contracts of up to two years, as they defected to rivals. Business clients also left due to the weak economy.

There are no clear signs that the business has made its turn, said Piper Jaffray analyst Christopher Larsen.

Sprint's net loss swelled to $594 million, or 21 cents per share from $505 million, or 18 cents per share in the same quarter a year ago. Before items such as amortization, it had a per share profit of 3 cents, compared with the average analyst forecast for a loss of 4 cents, Reuters Estimates said.

Sprint said it cut its work force by about 12.5 percent to 49,000 workers in the quarter, and told analysts on a conference call that it will cut another 1,000 jobs this quarter, as part of a previously announced plan.

Revenue fell 12 percent to $8.21 billion, below the average analyst expectation for revenue of $8.29 billion.

Chief Executive Dan Hesse said on the call that he was pleased by growth in prepaid, but that Sprint was being hurt by the economy and needed to do more to stem defections of monthly bill paying customers, called post-paid subscribers.

Sprint lost a net 1.25 million postpaid customers in the quarter, compared with the average forecast for a loss of 1.1 million customers from eight analysts contacted by Reuters.

PREPAID GROWTH

Sprint's Boost unit added 764,000 net new prepaid customers, who pay for calls in advance and do not commit to long-term contracts. Sprint said the growth was primarily driven by a new $50 unlimited service plan from Boost.

Eight analysts contacted by Reuters had on average been expecting Sprint to add about 185,000 prepaid customers, with estimates ranging from a loss of 150,000 to a gain of 600,000.

While postpaid subscribers are seen as the holy grail in the wireless industry because they pay set monthly fees and are locked into long-term contracts, Hesse said it made sense for Sprint to aggressively pursue prepaid subscribers, a much stronger growth segment in a down economy.

He forecast a similar level of prepaid customer additions in the current quarter due to the popularity of the new Boost plan and said Sprint expects 2009 postpaid and prepaid subscriber losses to improve compared with 2008.

Since he took over the CEO job in late 2007, one of Hesse's top priorities has been to improve Sprint's customer cancellation rate, known in the industry as churn.

In our assumptions, we expect to continue to improve churn and for economically driven losses not to get better or worse in the second half, he said.

The CEO said postpaid numbers for the second half of the year would be helped by Sprint's exclusive U.S. launch of Pre, a high-profile phone from Palm Inc
, in the current quarter. But he declined to say if Pre would be ready by June 9, when Apple Inc is expected to announce a new iPhone.

Some analysts said they are anxious to see concrete evidence of postpaid improvements.

Prepaid turned around but your highest value subscriber is your postpaid subscriber and that was the weakest to date, said Commresearch analyst Greg Lundberg.

Hesse said Sprint is evaluating the idea of having a third-party company manage some elements of its network to cut costs. But if it decides to go this route, Sprint would be careful to keep network control, he said.

We would still have management responsibility and ownership of the network, he said while declining to comment on media reports that Sprint is in talks with Ericsson to have the network equipment maker manage its wireless broadcast towers.

Sprint shares rose 56 cents or 12 percent to $5.23 in late morning trade on New York Stock Exchange.

(Reporting by Sinead Carew; Editing by Derek Caney)