Thank you, and good afternoon, everyone.
As Satya discussed, the COVID-19 health crisis is changing the way our employees, customers, partners and communities live and work together. In a new environment, our team addressed surging usage and remote business process adjustments well. Therefore, in Q3, revenue was $35 billion, up 15% and 16% in constant currency. Gross margin dollars increased 18% and 20% in constant currency. Operating income increased 25% and 28% in constant currency.
Our earnings per share was $1.40, increasing 23% and 27% in constant currency.
Let me take a moment to discuss the impact of COVID-19 on the quarter. In our consumer business, the landscape evolved quickly following our mid-quarter guidance update. The supply chain in China returned to more normal operations at a faster pace than we had anticipated. And we saw increased demand from work, play and learn-from-home scenarios, benefiting Windows OEM, Surface, Office Consumer and Gaming. This was partially offset by a significant reduction in advertising spend, which impacted our Search and LinkedIn businesses.
In our commercial business in March, we saw healthy Azure consumption and, as Satya mentioned, increased usage across Windows Virtual Desktop, Power Platform and Microsoft 365, particularly in Teams and our advanced security solutions.
However, we also saw some changes to our sales dynamics, particularly in the industries and segments most impacted by COVID-19. We saw a slowdown in our transactional business across segments but particularly in small and medium businesses.
In Enterprise Services, growth rates slowed as consulting projects were delayed. And on annual contracts in LinkedIn's Talent Solutions business, renewals were impacted by the weak job market.
Moving to our overall results. Commercial bookings increased 7% and 12% in constant currency on a relatively small expiration base and strong prior year comparable. Growth was driven by strong renewal execution, consistent with prior quarters, though we saw some impact from the previously mentioned changes in sales dynamics. Commercial remaining performance obligation increased 24% to $89 billion. Approximately 50% will be recognized in revenue in the next 12 months, in line with prior quarter trends.
Our commercial revenue annuity and mix increased 2 points year-over-year to 92%. And commercial cloud revenue was $13.3 billion, growing 39% and 40% in constant currency. Commercial cloud gross margin percentage increased 4 points year-over-year to 67%. Significant improvement in Azure gross margin percentage, including some benefit from short-term utilization gains as we worked through COVID-19-related supply chain constraints more than offset sales mix shift to Azure.
Company gross margin percentage was 69%, up 2 points year-over-year, driven by favorable segment sales mix and improvement across all 3 of our segments. In line with expectations, FX reduced revenue growth by 1 point and had no impact on operating expense growth. The FX impact on COGS growth was slightly more favorable than expected and reduced growth by 1 point. Operating expense grew 10%, slightly below expectations, primarily driven by lower marketing and travel spend in March. And operating expenses expanded this quarter -- excuse me, operating margins expanded this quarter as a result of higher gross margins and disciplined decisions to invest in strategic and high-growth areas.
Now to our segment results. In line with expectations, revenue from Productivity and Business Processes was $11.7 billion, increasing 15% and 16% in constant currency. Office Commercial revenue grew 13% and 15% in constant currency. Office 365 Commercial revenue grew 25% and 27% in constant currency, again driven by installed base growth across all workloads and customer segments as well as higher ARPU with strong upsell to E5. And Office 365 Commercial seats grew 20% to nearly 258 million, with an increasing mix from Microsoft 365.
Office Consumer revenue grew 15% and 17% in constant currency, driven by growth in Office 2019 and Office 365 subscription revenue. Office 365 Consumer subscribers grew to 39.6 million, benefiting from the increased demand noted earlier. Dynamics revenue grew 17% and 20% in constant currency, driven by Dynamics 365 growth of 47% and 49% in constant currency. LinkedIn revenue increased 21% and 22% in constant currency as early quarter momentum was slightly offset by the slowdown in advertising.
Segment gross margin dollars increased 16% and 18% in constant currency, and gross margin percentage increased 1 point year-over-year as improvements in Office 365 and LinkedIn margins more than offset an increase in cloud revenue mix. Operating expense increased 12% and 13% in constant currency, driven by continued investment in LinkedIn and cloud engineering. And operating income increased 20% and 23% in constant currency.
Next, the Intelligent Cloud segment. Revenue was $12.3 billion, increasing 27% and 29% 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 59% and 61% in constant currency, driven by continued strong growth in our consumption-based business.
In our per user business, our enterprise mobility installed base grew 34% to over 134 million seats, with continued benefit from Microsoft 365. And our on-premises server business grew 11% and 12% in constant currency, driven by the demand for our hybrid and premium solutions and continued benefit from the end of support for Windows Server 2008. Enterprise Services revenue increased 6% and 7% in constant currency as growth in Premier Support Services more than offset the consulting delays. Segment gross margin dollars increased 30% and 32% in constant currency, and gross margin percentage increased 2 points year-over-year as another quarter of significant improvement in Azure gross margins more than offset the growing mix of Azure IaaS and PaaS revenue. Operating expense increased 19%, primarily driven by continued investments in Azure, and operating income grew 42% and 46% in constant currency.
Now to More Personal Computing. Revenue was $11 billion, increasing 3% and 4% in constant currency, ahead of the revised expectations from our mid-quarter guidance update as better-than-expected Windows OEM, Surface and Gaming revenue more than offset lower-than-expected Search revenue. OEM as well as Surface revenue benefited from the improved supply chain in China, increased demand from remote scenarios and continued Windows 7 end of support dynamics. In OEM non-Pro, those dynamics were offset by continued pressure in the entry-level category.
Windows Commercial products and cloud services grew 17% and 18% in constant currency, again driven by Microsoft 365 and demand for our advanced security solutions. Search revenue ex TAC increased 1%, below our expectations, driven by significantly reduced advertising spend. And in Gaming, revenue declined 1% and was relatively unchanged in constant currency, driven by higher user engagement than expected. Xbox's content and services revenue increased 2% on a high prior year comparable with strong growth in Game Pass subscribers and Minecraft.
Segment gross margin dollars increased 6% and 8% in constant currency, and gross margin percentage increased 2 points year-over-year due to higher-margin sales mix. Operating expense declined 3%, driven by a redeployment of engineering resources to higher growth opportunities.
As a result, operating income grew 15% and 17% in constant currency.
Now back to total company results. Capital expenditures including finance leases were $3.9 billion, up 15% year-over-year to support growing demand for our cloud services and lower than expected driven by COVID-19-related delays across the supply chain. Cash paid for PP&E was $3.8 billion. Cash flow from operations was $17.5 billion and increased 29% year-over-year, driven by healthy cloud billings and collections. And free cash flow was $13.7 billion, up 25%. Other income and expense was negative $132 million, lower than anticipated due to FX remeasurement and net recognized losses on investments.
As a reminder, we are required to recognize unrealized gains or losses on our equity portfolio.
Our effective tax rate was slightly above 16%, in line with expectations. And finally, we returned $9.9 billion to shareholders through share repurchases and dividends, an increase of 33% year-over-year.
Now let's move to our outlook, starting with our expectations for COVID-19-related impact. In our consumer business, we expect continued demand across Windows OEM, Surface and Gaming from the shift to remote work, play and learn from home.
Our outlook assumes this benefit remains through much of Q4, though growth rates may be impacted as stay-at-home guidelines ease. We assume advertising spend levels from March do not improve in Q4, which will impact Search and LinkedIn.
In our commercial business, our strong position in durable growth markets means we expect consistent execution on a large annuity base, with continued usage and consumption growth across our cloud offerings.
However, we expect the sales dynamics from March to continue, including a significant impact in LinkedIn from the weak job market and increased volatility in new longer lead time deal closures.
In commercial bookings, growth from healthy renewal execution on a larger Q4 expiry base will be impacted by some large commitments in the prior year and the previously mentioned sales dynamics. Commercial cloud gross margin percentage will be relatively changed year-over-year as continued improvement in IaaS and PaaS gross margin percentage will be more than offset by revenue mix shift to Azure. And with the supply chain constraints easing, we expect a material sequential increase in our capital expenditures to support growing usage and demand for our cloud services.
Next to FX.
We expect a larger impact to our results due to the stronger U.S. dollar. Based on current rates, FX should now decrease total company, Productivity and Business Processes and Intelligent Cloud revenue growth by approximately 2 points and decrease More Personal Computing revenue growth and total company COGS and operating expense growth by approximately 1 point.
Now to segment guidance, which includes wider ranges than normal given the uncertainty in our business with higher in-quarter sales and revenue recognitions. In Productivity and Business Processes, we expect revenue between $11.65 billion and $11.95 billion. Approximately 80% of this revenue comes from the earnout on existing contracts and agreement renewals. The remaining 20% of revenue, primarily from annuity agreements, transactional licensing and LinkedIn, is subject to more volatility in the current environment.
In Office Commercial, revenue growth will continue to be driven by Office 365, with strong upsell opportunity particularly to our advanced security solutions.
However, growth will be partially offset by continued transactional weakness, some impact from the previously mentioned sales dynamics and a strong prior year comparable, where 4 points of growth were from a greater mix of contracts with higher in-period recognition.
In Office Consumer, we expect low single-digit revenue growth, down sequentially as subscription growth is offset by a slowdown in our Office 2019 transactional business. In LinkedIn, we expect continued strong engagement on the platform.
However, a material mix of revenue is driven by customer hiring needs and advertising. Therefore, we expect a significant slowdown to mid-single-digit revenue growth.
In Dynamics, we expect low double-digit revenue growth with continued Dynamics 365 momentum, offset slightly by a slowdown in new projects with longer lead times.
For Intelligent Cloud, we expect revenue between $12.9 billion and $13.15 billion. Approximately 80% of this revenue comes from the earnout on existing annuity contracts, agreement renewals and consumption from existing Azure workloads. The remaining 20%, which is primarily made up of new annuity agreements, transactional licensing and enterprise services consulting revenue, is subject to more volatility.
In Azure, revenue growth will again be driven by our consumption-based business, with continued strong growth across our customer base, though we expect some moderation in the most impacted industries and segments. And in our per user business, growth will be impacted by the increasing size of the installed base as well as the sales dynamic mentioned earlier. In our on-premises server business, we expect revenue to decline low single digits on a strong prior year comparable as continued hybrid demand is more than offset by some transactional weakness. And in Enterprise Services, we expect a low single-digit revenue decline, driven by continued delays in our consulting business.
In More Personal Computing, we expect revenue between $11.3 billion and $11.7 billion. Roughly 75% of this revenue across OEM, Surface, Search and Gaming is earned in quarter. In Windows, overall OEM revenue growth should be low to mid-single digits on a strong prior year comparable. In Windows Commercial products and cloud services, we expect mid-single-digit revenue growth with headwinds from our transactional business and the previously mentioned sales dynamics.
In Surface, the continued strong demand should drive revenue growth in the low teens. In Search ex TAC, we expect revenue to decline in the mid-20% range, similar to March. And in Gaming, we expect revenue growth in the high teens with continued strong user engagement across the platform.
Now back to overall company guidance.
We expect COGS of $11.55 billion to $11.75 billion and operating expense of $11.8 billion to $11.9 billion. Other income and expense should be negative $100 million as interest expense is expected to more than offset interest income. And finally, we expect our Q4 effective tax rate to be approximately 18%, slightly higher than our full year tax rate of 17% due to the geographic mix of the revenue.
I'd like to close sharing a few thoughts as we look beyond Q4 and into the next fiscal year.
Our focus remains on strategically managing the company for the long term, with decisions optimized for delivering greater customer value and long-term financial growth and profitability. With that, we'll continue to provide increased support to our customers and partners as they navigate the uncertain future ahead, deepening our engagement and adding increased value.
We will continue to aggressively expand our cloud infrastructure to support not only the usage surges of today but the growing customer demand for our unique and differentiated cloud offerings in the future.
We will continue to make significant investments against the strategic growth opportunities Satya outlined, organically and through strategic acquisitions like that of Affirmed Networks this quarter. And we have the flexibility given our strong financial position and free cash flow generation to do all of this and support our commitment to capital return.
Microsoft does well when our customers do well, and we are uniquely positioned to continue to invest and contribute to their future success.
With that, Mike, let's go to Q&A.