Thank you, Satya, and good afternoon, everyone.
This quarter, revenue was $36.9 billion, up 14% and 15% in constant currency. Gross margin dollars increased 22% and 25% in constant currency. Operating income increased 35% and 39% in constant currency, and earnings per share was $1.51, increasing 37% and 41% in constant currency, when adjusting for the net charges related to TCJA from the prior year.
Our sales teams and partners again delivered strong commercial results, and we continue to benefit from favorable secular trends. From a geographic perspective, we saw broad-based strength across all markets.
In our commercial business, we continued to see strong demand for our differentiated hybrid and cloud offerings with increased customer commitment to the Azure platform. And the unique value of Microsoft 365 bringing together Office 365, Windows 10 and enterprise mobility and security, as a secure intelligent solution, again drove adoption by both new and existing customers.
As a result, commercial bookings growth was ahead of expectations, increasing 31% and 30% in constant currency, with a high volume of new business and strong renewal execution.
Our commercial remaining performance obligation was $90 billion, up 30% year-over-year, driven by long-term customer commitments. Commercial cloud revenue was $12.5 billion, growing 39% and 41% in constant currency. Commercial cloud gross margin percentage increased five points year-over-year to 67%, driven again by material improvement in Azure gross margin percentage, which more than offset sales mix shift to Azure.
Company gross margin percentage was 67%, up five points year-over-year driven by favorable sales mix and improvement across all three of our segments. In the quarter, gross margin percentage benefited from lower console sales, stronger than expected software licensing results and improvement in our commercial cloud gross margin percentage.
In line with expectations, FX reduced revenue growth by one point and had no impact on operating expense growth. FX impact on COGS growth was slightly more favorable than expected and reduced growth by one point. Operating expense grew 9%, slightly below expectations, primarily driven by lower program spend. And operating margins expanded this quarter as a result of higher gross margins and operating leverage through disciplined decisions to invest in strategic and high growth areas.
Now to our segment results. Revenue from Productivity and Business Processes was $11.8 billion, increasing 17% and 19% in constant currency, ahead of expectations, driven by both our commercial and consumer businesses.
Office commercial revenue grew 16% and 18% in constant currency with roughly three points of on-premises benefit, primarily from transactional strength in Japan. Office 365 commercial revenue growth of 27% and 30% 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 grew 21% with an increasing mix from our Microsoft 365 suite. Office consumer revenue grew 19% and 20% in constant currency, driven by growth in Office 365 subscription revenue.
This quarter, growth was also impacted by roughly seven points of benefit from transactional strength in Japan and five points of benefit from the low prior year comparable related to the timing of the Office 2019 purchases.
Office 365 consumer subscriptions grew to 37.2 million. Dynamics revenue grew 12% and 15% in constant currency. Dynamics 365 revenue increased 42% and 45% in constant currency, with continued momentum in the number of customers adopting multiple Dynamics 365 workloads.
LinkedIn revenue increased 24% and 26% in constant currency, with continued strength across all businesses, highlighted by marketing solutions growth of 42%. LinkedIn sessions grew 25% with record levels of engagement again this quarter.
Segment gross margin dollars increased 21% and 23% in constant currency, and gross margin percentage increased two points year-over-year as improvements in Office 365 and LinkedIn margins more than offset, an increase in cloud revenue mix.
Operating expense increased 12%, driven by continued investment in LinkedIn and cloud engineering. And operating income increased 29% and 33% in constant currency.
Next, the Intelligent Cloud segment. Revenue was $11.9 billion, increasing 27% and 28% in constant currency, ahead of expectations, driven by continued customer demand for our hybrid offerings. On a significant base, server products and cloud services revenue increased 30% and 32% in constant currency. Azure revenue grew 62% and 64% in constant currency, driven by another quarter of strong growth in our consumption-based business across all customer segments.
In our per user business, our enterprise mobility installed base grew 35% to over 127 million seats, with continued benefit from Microsoft 365 suite momentum. And our on-premises server business grew 10% and 12% in constant currency, with roughly four points of benefit from the end of support for Windows Server 2008, in addition to the continued strength of our hybrid and premium solutions.
Nearly one-third of our Windows Server and SQL Server enterprise customers are already using our hybrid use benefits to deploy Azure, reflecting the value and flexibility of these offerings.
Enterprise Services revenue increased 6% and 7% in constant currency, driven by growth in premier support services. Segment gross margin dollars increased 28% and 31% in constant currency, and gross margin percentage increased one point year-over-year as another quarter of material improvement in Azure gross margin more than offset the growing mix of Azure IaaS and PaaS revenue. Operating expense increased 18%, primarily driven by continued investments in Azure. Operating income grew 38% and 42% in constant currency.
Now to More Personal Computing. Revenue was $13.2 billion, increasing 2% and 3% in constant currency, ahead of expectations as better-than-expected performance across our Windows businesses more than offset lower-than-expected search and surface revenue.
In Windows, overall PC market growth was stronger than we expected and benefited from the low prior year comparable related to the timing of chip supply to our OEM partners. OEM Pro revenue, which makes up roughly 40% of total Windows revenue, grew 26%, driven by continued momentum in advance of Windows 7 end of support and strong Windows 10 demand.
The benefit from the low prior year comparable drove roughly 11 points of that growth. OEM non-Pro revenue, which makes up roughly 20% of total Windows revenue, increased 4%.
This quarter, continued pressure in the entry-level category was more than offset by roughly seven points of benefit from the low prior year comparable and the timing of license purchases from an OEM partner. Inventory levels ended the quarter in the normal range.
Windows commercial products and cloud services revenue, which makes up roughly 30% of total Windows revenue, grew 25% and 27% in constant currency, again driven by strong demand for Microsoft 365, which carries higher in-quarter revenue recognition. The remainder of the Windows business is made up of our other licensing and services components.
Surface revenue increased 6% and 8% in constant currency, lower-than-expected as continued strong momentum in the commercial segment was partially offset by execution challenges in the consumer segment. Search revenue ex TAC increased 6% and 7% in constant currency, below expectations, primarily driven by lower Bing volume.
And in gaming, revenue declined 21% and 20% in constant currency, in line with expectations, driven by lower console sales as we approach the next Xbox launch. Xbox content and services revenue declined 11% and 9% in constant currency as the impact from a strong third-party title in the prior year more than offset continued growth in Game Pass subscribers and Minecraft.
Segment gross margin dollars increased 18% and 20% in constant currency, and gross margin percentage increased seven points year-over-year due to higher-margin sales mix. Operating expense declined 5% as redeployment of engineering resources to higher-growth opportunities was partially offset by gaming investments, primarily in first-party content.
As a result, operating income grew 41% and 45% in constant currency.
Now back to total company results. In line with expectations, capital expenditures including finance leases were $4.5 billion, up 17% year-over-year, driven by an ongoing investment to meet growing demand for our cloud services.
Cash paid for PP&E was $3.5 billion. Cash flow from operations was $10.7 billion and increased 20% year-over-year, driven by healthy cloud billings and collections. Free cash flow was $7.1 billion and increased 37%, reflecting the timing of cash payments for PP&E.
Other income was $194 million higher than anticipated due to the recording of mark-to-market gains in our equity portfolio.
Our effective tax rate was slightly above 17%, in line with expectations. And finally, we returned $8.5 billion to shareholders through share repurchases and dividends.
Now, let's move to our outlook.
Assuming current rates remain stable, we expect FX to decrease revenue at both the company and individual segment level by approximately one point and have no impact on total company COGS and operating expense growth.
In our commercial business, we expect consistent execution and continued demand for our hybrid solutions to drive another strong quarter. Commercial bookings growth should again be healthy, but will be impacted by a materially lower growth in our Q3 ex-rebase.
Commercial cloud gross margin percentage will continue to improve year-over-year, although at a lower rate than last quarter given the growing mix of Azure consumption-based services. And we expect a sequential dollar increase in our capital expenditure as we continue to invest to support growing demand.
Now to segment guidance. In Productivity and Business Processes, we expect revenue between $11.5 billion and $11.7 billion, driven by continued double-digit growth across Office Commercial, Dynamics, and LinkedIn.
For Intelligent Cloud, we expect revenue between $11.85 billion and $12.05 billion. In Azure, revenue growth will continue to reflect the balance of our strong growth in our consumption-based business and moderating growth in our per user business, given the size of the installed base.
Growth in our on-premise server business should be high single digits, again driven by strong hybrid demand as well as some continued benefit related to the end of support for Windows Server 2008.
In Enterprise Services, we expect revenue growth to be slightly higher than last quarter. In More Personal Computing, we expect revenue between $10.75 billion and $11.15 billion.
In Windows, overall, OEM revenue growth should be in the low to mid-single-digits and continue to reflect healthy Windows 10 demand, end of support for Windows 7, and the supply chain's ability to meet demand. The wider-than-usual range in More Personal Computing segment reflects uncertainty related to the public health situation in China.
In Windows, Commercial Products and Cloud Services, we expect another quarter of healthy double-digit revenue growth, driven by continued Microsoft 365 suite momentum and some benefit from Windows 7 extended support agreements.
In Surface, we expect revenue growth in the low single digits as we work through the execution challenges in the consumer segment. In Search ex TAC, we expect revenue growth similar to Q2.
And in Gaming, we expect revenue to decline in the low double-digit range, driven by the continuation of the console trend as we near the launch of Xbox Series X as well as lower transaction volume on a third-party title.
Now, back to the overall company guidance.
We expect COGS of $11.05 billion to $11.25 billion and operating expense of $11.2 billion to $11.3 billion. In other income and expense, interest income and expense should offset each other. And finally, we expect our Q3 effective tax rate to be slightly below our full year rate of 17% due to the timing of equity vests.
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 the continued strength of our commercial business.
For operating expense, as a result of lower spend in H1, we now expect full year growth between 10% and 11%.
And finally, given our strong H1 results, particularly in high margin businesses, as well as the expected sales mix for the remainder of the year, we now expect operating margins to be up roughly two points year-over-year, even as we invest with significant ambition in strategic and high-growth areas in the second half of this year.
With that, Mike, let's go to Q&A.