Thank you, Satya, and good afternoon, everyone.
This quarter, revenue was $33.1 billion, up 14%, and 15% in constant currency. Gross margin dollars increased 18%, and 20% in constant currency. Operating income increased 27%, and 32% in constant currency, and earnings per share was $1.38, increasing 21%, and 25% in constant currency. Consistent execution and strong demand for our hybrid and cloud offerings drove a solid start to the fiscal year with another quarter of double-digit top and bottom line growth. From a geographic perspective, we saw broad-based strength across all markets.
In our Commercial business, we again saw increased customer commitment across our cloud platform. In Azure, we had material growth in the number of $10 million plus contracts.
Additionally, Microsoft 365 drove new customer adoption as well as expansion in our existing customer base, given the strong value Office 365, Windows 10, and Enterprise Mobility and Security provide at a secure intelligence solution.
As a result, Commercial bookings growth was ahead of expectations, increasing 30%, and 35% in constant currency, with a higher volume of new business and strong renewal execution. Commercial annuity mix increased to 91% and Commercial unearned revenue was ahead of expectations at $31.1 billion, up 14% and 16% in constant currency.
Our Commercial remaining performance obligation was $86 billion, up 26% and 27% in constant currency, driven by these long-term customer commitments.
As a reminder, going forward, we will disclose the Commercial remaining performance obligations as a KPI, which better reflects commitments our customers are making across all contract types. Commercial Cloud revenue was $11.6 billion, growing 36% and 39% in constant currency. Commercial Cloud gross margin percentage increased 4 points year-over-year year to 66%, as significant improvement in Azure gross margin offset a sales mix shift to Azure. Company gross margin percentage was 69%, up 3 points for year-over-year and ahead of our expectations, driven by sales mix to higher margin businesses.
The U.S. dollar was a bit weaker than anticipated, which resulted in slightly less impact to our results. FX reduced revenue growth by less than 2 points, and cogs and operating expenses growth by approximately 1 point. Operating expenses grew 8% to 9% in constant currency, slightly lower than expectations mainly driven by the timing of marketing and project spend. And operating margins expanded this quarter, driven by the combination of higher gross margins and operating leverage through effective resource allocation.
Now, to our segment results. Revenue from Productivity and Business Processes was $11.1 billion, increasing 13% and 15% in constant currency, ahead of expectations, primarily driven by On-Premises Office Commercial business. Office Commercial revenue grew 13% and 15% in constant currency, and benefited approximately 2 points from the transactional strength in Japan.
Office 365 Commercial revenue growth of 25% and 28% in constant currency was again driven by installed base growth across all workloads and customer segments, as well as higher ARPU. Office 365 Commercial Seats increased 21% with a growing mix from our Microsoft 365 suite.
Office Consumer revenue grew 5% and 6% in constant currency with roughly 7 points of benefit from transactional strength in Japan, more than offsetting the strong prior year comparable related to the launch of Office 2019. Office 365 consumer subscribers grew to 35.6 million.
Dynamics revenue grew 14% and 16% in constant currency, driven by Dynamics 365 revenue growth of 41% and 44% in constant currency. LinkedIn revenue increased 25% and 26% in constant currency with continued strength across all businesses. LinkedIn sessions increased 22% as engagement again reached record levels. Segment gross margin dollars increased 16% and 19% in constant currency, and gross margin percentage increased 2 points year-over-year as improvements in LinkedIn and Office 365 margins more than offsets an increase in cloud revenue mix.
Operating expenses increased 8% and 9% in constant currency, driven by continued investment in LinkedIn and Cloud Engineering. Operating income increased 23% and 27% in constant currency.
Next, the Intelligent Cloud segment. Revenue was $10.8 billion, increasing 27% and 29% in constant currency, ahead of expectations, driven by our on-premises server business. On a significant base, server products and cloud services revenue increased 30% and 33% in constant currency, driven by continued demand from our hybrid value.
Azure revenue increased 59% and 63% in constant currency, with strong growth in our consumption-based business across all customer segments, partially offset by further moderation in our per-user business.
Our Enterprise Mobility installed base grew 36% to over 120 million seats, benefiting from the Microsoft 365 suite momentum. And our on-premises server business grew 12% and 14% in constant currency, driven by continued strength across our hybrid and premium offerings, GitHub and roughly 4 points of benefit from the end of support for SQL and Windows Server 2008.
Enterprise Services revenue increased 7% and 8% in constant currency, driven by growth in Premier Support services. Segment gross margin dollars increased 27% and 30% in constant currency. Gross margin percentage was up slightly as another quarter of material improvement in Azure gross margin was partially offset by a growing mix of Azure IaaS and PaaS revenue.
Operating expenses increased 22%, driven by ongoing engineering and sales investments and cloud and AI, including GitHub. Operating income grew 33% and 38% in constant currency.
Now to More Personal Computing. Revenue was $11.1 billion, increasing 4% and 5% in constant currency, ahead of expectations as better than expected performance in our OEM Pro and Windows Commercial businesses, more than offset lower than expected monetization across third-party titles within gaming. In Windows, OEM non-Pro revenue declined 7%, below the consumer PC market, with continued pressure in the entry level category. OEM Pro revenue grew 19%, ahead of the commercial PC market, driven by strong Windows 10 demand and momentum in advance of the Windows 7 end of support. Inventory levels ended the quarter in the normal range.
Windows Commercial products and cloud services revenue grew 26% and 29% in constant currency, driven by healthy demand for Microsoft 365, which carries higher in-quarter revenue recognition.
Surface revenue declined 4% and 2% in constant currency, driven by the timing of product lifecycle transitions ahead of the recently announced product launches. Search revenue ex TAC increased 11% and 13% in constant currency, driven by Bing rate growth.
In gaming, revenue declined 7% and 6% in constant currency, driven by lower console sales. Xbox content and services revenue was relatively unchanged and increased 1% in constant currency with growth from Minecraft, Gears of War 5 and Game Pass subscriptions offset by a strong third-party title in the prior year.
Segment gross margin dollars increased 12% and 13% in constant currency and gross margin percentage increased 4 points due to higher margin sales mix. Operating expenses declined 7% and 6% in constant currency as redeployment of engineering resources to higher growth opportunities was partially offset by investments in gaming.
As a result, operating income grew 28% and 31% in constant currency.
Now, back to total Company results. Capital expenditures including finance leases were $4.8 billion, up 12% year-over-year, driven by ongoing investment to meet growing demand for our cloud services and slightly below expectations due to normal quarterly spend variability in the timing of our cloud infrastructure build out. Cash paid for PP&E was $3.4 billion.
Cash flow from operations was $13.8 billion and increased 1% year-over-year, as strong cloud billings and collections were partially offset by tax payments related to the Q4 transfer of intangible property. Free cash flow was $10.4 billion and increased 4%.
Excluding the impact of these tax payments, cash flow from operations and free cash flow grew 27% and 39%, respectively.
As expected, in other income and expense, interest income was offset by interest expense, foreign currency remeasurement and recognized losses on investments.
Our effective tax rate was 16%, in line with expectations. And finally, we returned $7.9 billion to shareholders through share repurchases and dividends, an increase of 28% year-over-year.
Now, let’s move to our outlook.
Assuming current rate remains stable, we expect FX to decrease Intelligent Cloud revenue growth by approximately 2 points, total Company Productivity and Business Processes and More Personal Computing revenue growth by approximately 1 point, and have no impact on total Company COGS and operating expenses growth.
We expect another strong quarter in our commercial business. Demand for our hybrid offerings and cloud services remained strong and capital expenditures will continue to reflect that.
Given the normal variability and infrastructure spend timing, we expect Q2 CapEx spend to be down slightly on a sequential basis, but still growing from the prior year. And Commercial Cloud gross margin percentage will continue to improve on a year-over-year basis, even with the continued mix of revenue toward Azure consumption-based services.
Now to segment guidance. In Productivity and Business Processes, we expect revenue between $11.3 billion and $11.5 billion, driven by double-digit growth across Office Commercial, Dynamics, and LinkedIn.
For Intelligent Cloud, we expect revenue between $11.25 billion and $11.45 billion. In Azure, we expect continued strong growth in our consumption-based business and moderating growth in our per-user business, given the size of the installed base.
Our on-premises server business will be driven by demand for our hybrid and premium solutions, as well as the continued benefit from increased demand ahead of the end of support for Windows Server 2008. In More Personal Computing, we expect revenue between $12.6 million and $13 million. In Windows, overall OEM revenue growth should again be ahead of the PC market as we balance healthy Windows 10 demand and the benefit from the upcoming end of support for Windows 7 with the supply chain’s ability to meet this demand in Q2.
Based on our customer demand signal and prior end of support cycles, we expect some continued momentum past January, end of support deadline. In Windows Commercial, products and cloud services, we expect another strong quarter, benefiting from continued Microsoft 365 momentum.
In Surface, the launch of the latest Surface Pro and Surface laptop devices should drive low double digit revenue growth on a strong prior year comparable. In Search ex TAC, we expect revenue growth similar to Q1. And in gaming, we expect revenue to decline in the mid-20% range driven by lower console sales as we near the end of this generation, as well as the most challenging quarterly comparable and third-party titles from last year.
Now, back to overall Company guidance.
We expect COGS of $12.45 billion to $12.65 billion, and operating expenses of $10.8 billion to $10.9 billion. Other income and expense should be approximately $50 million as interest income is partially offset by interest and finance lease expense. And finally, we expect our Q2 effective tax rate to be slightly above the full-year rate of 17%.
Now, let me share some additional comments on the full year. At the Company level, we continue to expect double digit revenue and operating income growth, driven by continued momentum in our commercial business.
Given our strong first quarter results and the expected sales mix for the remainder of the year, we now expect operating margins to be up slightly year-over-year, even as we continue to invest with significant ambition in high growth areas.
With that, Mike, let’s go to Q&A