Shares of the company, which focuses on cost-conscious customers and competes with MetroPCS Communications Inc, fell 15 percent in trading after the bell.

The company said customer retention programs did not work out as well as expected and came at a higher-than-anticipated cost.

Leap and some other low-cost carriers have been hurt by rising competition that has forced them to shift focus toward smartphones, but this has also lead to costly subsidies to boost subscriber growth.

"While we had substantial handset supply throughout the quarter, certain popular handsets were either not available for sale because of quality issues or did not meet changes in customer needs over time," CEO Doug Hutcheson said on a call with analysts.

"In some cases, this required the company to meet customer demand with more expensive devices, increasing our subsidy expense."

Leap said in May that it would sell the iPhone, joining much bigger national rivals Verizon Wireless, AT&T Inc and Sprint Nextel Corp in selling the popular Apple Inc device.

The company will sell the 16 GB iPhone 4S for $499.99, compared with its rivals' $199.99 price tag. Leap customers, however, will pay smaller monthly service fees and will not need to sign long-term contracts.

Customer retention in the quarter was also hurt by reduced promotional activity, Chief Financial Officer Jerry Elliott told Reuters.

He sees some of these problems continuing into the third quarter, but said the retention programs have been stopped and expects ARPU to track back to higher levels.

FALLING NUMBERS

Leap reported a net subscriber loss of about 289,000 in the second quarter, compared with a net loss of about 103,000 customers a year earlier.

Analysts had expected its subscriber numbers to fall by 48,000 to 100,000, according to five analysts contacted by Reuters.

Average revenue per user fell for the first time since the third quarter of 2010 to $41.64, while churn — or customer defection rate — rose to 4.4 percent from 4.2 percent a year earlier.

Net loss attributable to common stockholders narrowed to $41.6 million, or 54 cents per share, for the second quarter from $65.2 million, or 85 cents per share, a year earlier.

Revenue rose 3.5 percent to $786.8 million.

Analysts on average had expected a loss of 50 cents per share on revenue of $836.3 million, according to Thomson Reuters I/B/E/S.

MetroPCS reported second-quarter earnings well above analysts' estimates last month as it cut costs by holding back on smartphone promotions.

Shares of the company, which closed up 6 percent at $5.52 on the Nasdaq on Monday, fell to $4.70 in trading after the bell.

The stock has fallen 10 percent since it said it would start selling the iPhone on concerns that margins would be hurt.

(Reporting by Sayantani Ghosh in Bangalore; Editing by Joyjeet Das, Anthony Kurian)

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