Thank you, Satya, and good afternoon everyone.
Our fourth quarter revenue was $33.7 billion, up 12% and 14% in constant currency. Gross margin dollars increased 15% and 17% in constant currency. Operating income increased 20% and 24% in constant currency.
This quarter we transferred intangible properties from our foreign subsidiaries to the United States and Ireland, which resulted in a net tax benefit of $2.6 billion. When adjusting for this and the net benefit related to the Tax Cuts and Jobs Act from the fourth quarter of FY18, earnings per share was $1.37, increasing 21% and 24% in constant currency.
In our largest quarter of the year, our sales teams and partners delivered exceptional commercial results, which drove another quarter of double-digit top and bottom line growth. From a geographic perspective, we saw broad-based strength across markets of all sizes.
Customer commitment to our cloud platform continues to grow. In FY19, we closed a record number of multi-million dollar commercial cloud agreements, with material growth in the number of $10 million plus Azure agreements. Commercial bookings growth was significantly ahead of expectations, increasing 22% and 25% in constant currency, driven by strong renewal execution and an increase in the number of larger, long-term Azure contracts.
As a result, our contracted not recognized revenue was $91 billion, up 25% year-over-year, reflecting our continued momentum and growing long-term customer commitment.
We expect to recognize approximately 50% of this revenue in the next 12 months. Even with the higher mix of larger, long-term Azure contracts with low upfront billings, commercial unearned revenue was in line with expectations at $34.1 billion, up 13% and 16% in constant currency. And this quarter, our annuity mix was again 90%.
Commercial Cloud revenue was $11 billion, growing 39% and 42% in constant currency. Commercial cloud gross margin percentage increased 6 points year-over-year to 65%, driven again by significant improvement in Azure gross margin. The Company gross margin percentage was 69%, up 2 points year-over-year and ahead of our expectations, driven by sales mix shift to commercial licensing and OEM.
In line with expectations, foreign exchange reduced revenue growth by 2 points and COGS and operating expenses growth by 1 point. Operating expenses grew slightly ahead of expectations, increasing 9% and 10% in constant currency driven by continued investment in cloud and AI engineering, LinkedIn, and GitHub.
Operating margins expanded again this quarter, as a result of strong revenue growth, improving gross margins, and disciplined decisions we’ve made over the past 5 years to invest in strategic and high growth areas.
Now to our segment results. Revenue from Productivity and Business Processes was $11 billion, increasing 14% and 17% in constant currency, ahead of expectations driven by both our cloud and on-premises businesses.
Office commercial revenue grew 14% and 16% in constant currency, including roughly 4 points from a greater mix of contracts with higher in-period recognition that benefited both our cloud and on-premises businesses. Office 365 commercial revenue grew 31% and 34% in constant currency, driven by installed base expansion across all workloads and customer segments, as well as ARPU growth from our customers’ continued shift to our E3 and E5 offerings.
Office 365 commercial seats grew 23% on a prior year comparable that included the strong performance of our Microsoft 365 academic offers. Office Consumer revenue grew 6% and 8% in constant currency, with 4 points of growth from transactional sales in Japan. Office 365 consumer subscriptions grew 34.8 million.
Our Dynamics business grew 12% and 15% in constant currency, driven by Dynamics 365 growth of 45% and 48% in constant currency. LinkedIn revenue increased 25% and 28% in constant currency with continued strength across all businesses, highlighted by marketing solutions growth of 42%. LinkedIn sessions grew 22%, with record levels of engagement and job postings again this quarter.
Segment gross margin dollars increased 16% and 20% in constant currency and gross margin percentage increased 1 point year-over-year as improvements in LinkedIn and Office 365 margins more than offset increased cloud mix.
Operating expenses increased 8% and 9% in constant currency driven by continued investment in LinkedIn and cloud engineering. Operating income increased 25% and 31% in constant currency.
Next, the Intelligent Cloud segment. Revenue was $11.4 billion, increasing 19% and 21% in constant currency.
Our on-premises server business drove our better than expected performance.
Continued customer demand for our differentiated hybrid solutions drove strong server products and cloud services revenue growth, increasing 22% and 24% in constant currency on a significant revenue base.
Azure revenue increased 64% and 68% in constant currency with another quarter of strong growth in our consumption-based business and continued moderation in our per-user business. And our on-premises server business grew 5% and 7% in constant currency, with roughly 4 points from stronger than expected demand ahead of end of support for SQL and Windows server 2008, as well as continued strength across our hybrid offerings, premium versions, and GitHub. Enterprise Services revenue increased 4% and 6% in constant currency, driven by growth in Premier Support Services.
Segment gross margin dollars increased 19% and 21% in constant currency. Gross margin percentage was flat year-over-year as another quarter of material improvement in Azure gross margin offset the growing mix of Azure IaaS and PaaS revenue.
Operating expenses increased 23% and 24% in constant currency, driven by on-going investments in Cloud and AI engineering and GitHub, as well as revenue driven expenses given the strength of the quarter. Operating income increased 15% and 19% in constant currency.
Now to the More Personal Computing segment. Revenue was $11.3 billion, increasing 4% and 6% in constant currency, ahead of expectations as better than expected performance in Windows more than offset lower than expected Gaming and Search revenue.
In Windows, OEM non-Pro revenue declined 8%, below the consumer PC market with continued pressure in the entry level category. OEM Pro revenue grew 18%, ahead of the commercial PC market, driven by healthy Windows 10 demand, strong momentum in advance of the Windows 7 end of support, and roughly 4 points of benefit from increased inventory levels due to uncertainty around tariffs. Therefore, inventory levels ended the quarter above the normal range.
Windows commercial products and cloud services grew 13% and 16% in constant currency, with strong double-digit billings growth and a higher mix of in-quarter recognition from multi-year agreements. In Surface, revenue grew 14% and 17% in constant currency driven by strength in our commercial segment, particularly in the U.S., Japan, and Canada.
Search revenue ex TAC increased 9% and 10% in constant currency, below expectations driven by lower than expected volume. In Gaming, revenue declined 10% and 8% in constant currency, below expectations driven by lower console sales and monetization across third party titles.
Xbox software and services revenue declined 3% and 1% in constant currency with the tough comparable from a third-party title in the prior year offsetting continued momentum in Xbox Live and Game Pass subscriber growth.
Segment gross margin dollars increased 8% and 10% in constant currency and gross margin percentage increased 2 points due to sales mix shift to our higher margin Windows businesses. Operating expenses declined 2% and 1% in constant currency.
As a result, operating income grew 18% and 22% in constant currency.
Now back to total company results.
As expected, capital expenditures including finance leases were up sequentially to $5.3 billion driven by ongoing investment to meet demand for our cloud services. Cash paid for PP&E was $4.1 billion.
Cash flow from operations increased 41% year-over-year driven by strong cloud billings and collections and roughly 8 points of benefit from tax payments made in the prior year. Free cash flow was $12 billion and increased 62% year-over-year, reflecting strong operating cash flows and the timing of cash payments for PP&E.
For the fiscal year, we generated over $52 billion in operating cash flow and $38 billion in free cash flow, driven by improving margins and operating leverage across our businesses, as well as operating improvements to better optimize cash flow.
Other income was $191 million, higher than anticipated due to recording of mark-to-market gains.
As a reminder, under the recently adopted accounting standards for financial investments, we’re required to recognize unrealized gains or losses on our equity portfolio.
As a result, we expect increased quarterly volatility in other income and expense.
Our non-GAAP effective tax rate came in slightly lower than anticipated at 16%.
And finally, this quarter, we returned $7.7 billion to shareholders through share repurchases and dividends, an increase of 45%, bringing our total cash returned to shareholders to over $30 billion for the full fiscal year.
Now let’s move to our outlook, starting with Q1, where we expect another strong commercial quarter.
Assuming current rates remain stable, we expect FX to decrease total company, Productivity and Business Processes, and Intelligent Cloud revenue growth by approximately 2 points and more Personal Computing revenue and total company COGS and operating expenses growth by approximately 1 point.
In our commercial business, we expect continued customer demand to drive commercial unearned revenue up 11% to 12% year-over-year with volatility based on contract type. Commercial cloud gross margin percentage will be up slightly on a sequential basis. And we expect capital expenditures to be roughly in line with Q4 as we continue to invest to meet growing demand for our cloud services.
Now to segment guidance. In Productivity and Business Processes, we expect revenue between $10.7 billion and $10.9 billion driven by double-digit growth in Office commercial, Dynamics, and LinkedIn.
In Intelligent Cloud, we expect revenue between $10.3 billion and $10.5 billion. In Azure, revenue growth will continue to reflect a balance of strong growth in our consumption-based business and moderating growth in our per-user business.
Our on-premises server business will be driven by demand for our hybrid solutions and premium offerings, as well as the continued benefit from the end of support for SQL Server and Windows Server 2008.
In More Personal Computing, we expect revenue between $10.7 billion and $11 billion. In Windows, overall OEM revenue growth should be slightly ahead of the PC market driven by healthy commercial demand. Surface revenue will decline slightly year over year driven by product lifecycle transitions. Search ex TAC revenue growth should be roughly in line with Q4.
And in Gaming, we expect revenue to decline year over year at a similar rate to Q4 as we move through the end of this console generation and a challenging Xbox software and services comparable from a third-party title in the prior year.
Now back to overall company guidance.
We expect COGS of $10.55 billion to $10.75 billion and operating expenses of $10.1 billion to $10.2 billion. In other income and expense, interest income and expenses should offset each other.
Next, we expect our Q1 effective tax rate to be slightly lower than our full-year expected rate of 17% due to the volume of equity vests that take place during our first quarter. And finally, as a reminder on Q1 cash flow, we will be making a $4.7 billion tax payment related to TCJA transition tax and the Q4 transfer of intangible property.
Now I would like to share some comments on FY20.
Assuming that current rates remain stable, we expect FX to reduce full-year revenue and COGS growth by 1 point. FX should have no impact on operating expense growth.
Next, revenue. At the company level, we continue to expect double-digit revenue growth with another year of strong performance and continued momentum in our commercial business.
As a reminder, our commercial licensing and OEM Pro businesses in the second half of the year will be impacted by a comparable that benefitted from the end of support of SQL server 2008, Windows server 2008, and Windows 7, as well as transactional strength in Japan.
We expect revenue in our gaming business to be down slightly year-over-year as double-digit growth in Xbox Software and Services will be offset by declining console sales. We do expect a stronger H2 than H1 in Gaming as we work through a third-party title comparison.
And as a reminder, an increasing number of large, long-term Azure contracts will drive more quarterly volatility in our commercial bookings and unearned revenue growth.
Next, commercial cloud gross margin. Revenue mix will continue to shift to our Azure consumption-based services. Even with this headwind, we expect commercial cloud gross margin percentage to be up slightly as we again drive meaningful improvement in Azure gross margin. Capital expenditures will increase to meet the growing demand for our cloud services.
Finally, on operating expenses, we will continue to invest given our strong execution, growing competitive position, and our significant ambition in high growth areas. Investment in areas like Cloud through AI and GitHub, Business Applications through Dynamics, Power Platform, and LinkedIn, Microsoft 365 through Teams, Security, and Surface as well as Gaming should result in operating expense growth of 11% to 12%.
Even with these strategic investments, the continued shift to our cloud business, and our very strong finish to FY19, we expect double-digit operating income growth as well as stable operating margins.
We are looking forward to FY20.
With that, Mike, let's go to Q&A.