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By Ina Fried, 22 July 2005 09:15

NEWS Microsoft quarterly profits are up nine per cent to $3.7bn, boosted by a government tax break.

The software giant said that it earned $3.7bn on revenue of $10.16bn for its fiscal fourth quarter ended 30 June In the same quarter a year earlier, it posted earnings of $2.69bn on revenue of $9.29bn.

The earnings were boosted by a tax benefit that amounted to nine cents per share, but reduced by legal costs that added up to five cents a share.

Revenue was just shy of analysts' $10.17 bn average First Call estimate. For the first quarter, the company forecasted it will earn between 29 and 31 cents per share on revenue of $9.7 billion to $9.8bn. Analysts were expecting slightly higher revenue of $9.9bn, according to First Call.

For Microsoft's coming fiscal year, which stretches through June, Microsoft said it expects earnings between $1.27 and $1.32 per share, with revenue in the range of $43.7bn to $44.5bn.

There had been some speculation that the report might be particularly good, given some upbeat comments that chief executive Steve Ballmer made at a partner conference, as well as a recent pay raise given to sales chief Kevin Johnson.

The report comes as investors are searching for some clues about the financial impact from new versions of Office and Windows, the company's two main products. The updates are both due next year, with a test version of Longhorn - the new Windows - due out this summer.

Microsoft's balance of unearned revenue, money that the company has received for contracts that stretch beyond the quarter, rose to $9.17bn from $7.94bn in the prior quarter. The figure is a closely watched indicator of the company's long-term prospects.

The company's legal charges of $756m included $626m related to its settlement with IBM.

As for Microsoft's individual units, the Client division, which includes desktop versions of Windows, saw fourth-quarter revenue rise 10 per cent from a year earlier, to $3.03bn. The unit recorded quarterly operating income of $2.18bn, up seven per cent.

The Server and Tools group saw quarterly sales rise 16 per cent from the prior year to $2.68bn, with operating income up 32 per cent to $800m. The Information Worker unit, which includes Office, saw revenue in the period increase three per cent to $2.91bn, though its operating income declined one per cent to just under $2bn.

The Business Solutions unit, a smaller group that sells enterprise applications to midsized companies, saw its fourth-quarter sales rise 11 per cent to $247m, but its operating loss widened by nine per cent to $76m year-over-year.

MSN saw revenue drop one percent to $582m, but its operating profits more than tripled to $104m compared with the same quarter last year.

The Home and Entertainment division, which includes the Xbox, posted a 22 per cent increase in quarterly revenue to $610m. In addition, it nearly halved its operating loss compared with the prior year, posting a loss of $179m.

The Mobile and Embedded device unit, which includes software for mobile phones and handhelds, saw its sales in the fourth quarter climb 39 per cent to $97m. The group posted a 64 per cent narrower loss at $14m.

Microsoft's cash holdings of $37.75bn were roughly flat from the prior quarter, as the company issued $859m in dividends and repurchased common stock worth $4.31bn.

Ina Fried writes for CNET News.com