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Microsoft’s earnings fell short of Wall Street forecasts in the latest quarter as it was hit by higher costs than expected to get its new Xbox 360 games console into consumers’ hands and increased spending in an effort to turn round its struggling MSN online services business.

Microsoft also predicted a big and unexpected jump in costs in its next fiscal year, beginning in July, thanks to the planned launch of the Windows Vista operating system and higher online costs to compete with Google and Yahoo. As a result, the company predicted earnings per share for the year of $1.36-1.41, far short of the $1.53 most analysts expected.

The forecast showed that costs were “snowballing” as the software company faced the threat from new online competitors, said Rick Sherlund, software analyst at Goldman Sachs.

The news late on Thursday wiped more than 5 per cent from its shares in after-market trading.

Despite that, Microsoft’s revenue growth continued to accelerate steadily in the latest quarter as it benefited from a range of products launched in recent months, from the Xbox 360 to the latest edition of SQL Server database software. It also issued a forecast of 12-14 per cent growth for next year, compared with the 12 per cent analysts have projected.

Leaving aside a 3 cents a share legal charge, earnings would have grown to 31 cents a share, from 28 cents a share on the same basis the year before, the company said. That was 2 cents a share below expectations. Revenues, meanwhile, rose 13 per cent to $10.9bn, about $150m short of what most analysts had expected.

Chris Liddell, chief financial officer, attributed the revenue shortfall mainly to a lower “attach rate” on first-generation Xbox consoles, as customers bought fewer new games for each console. Meanwhile, much of the higher operating costs were due to expenses associated with the new version of the console, he added. Microsoft faced a rush to get the machines into stores after component shortages and other supply chain problems left it unable to meet initial demand over Christmas.

Sales of the new console pushed up revenues for the company’s home and entertainment division by 85 per cent, to more than $1bn, though losses jumped to $388m. Meanwhile, MSN reported a loss of $26m as its revenues slipped 3 per cent, to $561m. The company’s search advertising business had shown an improvement, “but it’s not as much of an improvement as we’d like to see,” said Mr Liddell.

The server and tools unit again contributed most of the growth, with revenues up 16 per cent to $2.8bn. At the client division, based on the Windows PC business, revenues rose 7.5 per cent to $3.2bn, while revenues at the information worker unit rose 5 per cent to $2.9bn.

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