Thank you, Satya. And good afternoon, everyone.
This quarter revenue was $43.1 billion up 17% and 15% in constant currency. Earnings per share was $2.03 increasing 34% and 31% in constant currency. Across our business results exceeded expectations driven by strong execution and improving trend across industries, customer segments and geographical markets resulting in double digit top and bottom line growth. In our commercial business customers prioritize their digital transformation which drove healthy demand for our hybrid and cloud offerings with material growth in the number of $10 million plus Azure and Microsoft 365 contracts. We saw stronger Azure consumption as well as higher usage of Teams, Power Platform and our advanced security and compliance offerings and within our small and medium business customer segments transactional licensing trends continued to show some improvement. [indiscernible] our Windows OEM, Office consumer and a surface businesses. The advertising market continue to show improvement benefiting our search and LinkedIn businesses and in gaming, we saw record engagement and monetization across our platform as well as console demand that has significantly exceeded supply following the Xbox series X and S launches.
Moving to our overall results. Even with the declining expiration base and a strong prior year comparable commercial bookings increased 19% and 11% in constant currency. Strong execution across our core annuity sales motions including the Azure and Microsoft 365 momentum that earlier drove the better than expected result. Commercial remaining performance obligation increased 24% to 22% of constant currency to $112 billion with a roughly equivalent split between the revenue that will be recognized within and the portion beyond the next 12 months. And our annuity mix increased 4.0 over year to 93%. Commercial cloud revenue was $16.7 billion as growth accelerated to 34% and 32% in constant currency. Commercial cloud gross margin percentage expanded 4.0 points year-over-year to 71% driven by the change in accounting estimate for the useful life of server and networking equipment assets.
Excluding this impact commercial cloud gross margin percentage was up slightly.
As a reminder revenue mix shift to Azure increased customer usage of our productivity and collaboration solutions and continue strategic investments to support customers success and the deployment of our solutions will continue to impact gross margin.
With the weaker U.S. dollar FX increased revenue growth by approximately 2 points about a point more favorable than anticipated. FX had no impact on comps growth and increased operating expense growth by approximately one point both in line with expectations. Gross margin dollars increased 18% and 16% constant currency. Gross margin percentage was 67% up slightly year-over-year with roughly 2 points of favorable impact from the change in accounting estimate noted earlier.
Excluding this impact company gross margin percentage was down driven by the sales mix shift to cloud and gaming. Operating expenses increased 3% and 2% constant currency lower than anticipated driven by greater than expected COVID related savings, reductions and retail store expenses and investments that shifted to future quarters. Overall company headcount grew more than 10% to year-over-year with our focused investment in key areas such as customer success, cloud engineering and sales. Operating income increased 29% and 26% in constant currency and operating margins expanded 4 points year-over-year to 42% including roughly 2 points of favorable impact from the change in accounting estimate and nearly one point of variable impact from COVID related savings.
Now to our segment results. Revenue from productivity and business processes was $13.4 billion increasing 13% and 11% in constant currency ahead of expectations primarily driven by office commercial and LinkedIn on a stronger prior year comparable and included roughly 3 points of benefits primarily from transactional strength in Japan. Office commercial revenue grew 11% and 9% in constant currency. Office 365 commercial revenue grew 21% and 20% constant currency. Results were driven installed base expansion across all workloads and customer segments as well as higher ARPU. The strong demand for Microsoft 365 noted earlier particularly for our security, compliance and voice components drove E5 revenue growth acceleration again this quarter. Paid Office 365 commercial seats increased 15% year-over-year with strong conversion of our free trial offers.
We also saw a steep growth improvement in our small and medium business and first line worker offerings. Office consumer revenue grew 7% and 6% in constant currency on a strong comparable that included roughly 7 points of benefit from transactional strength in Japan. Microsoft 365 consumer subscriptions grew to 47.5 million up 28% year-over-year. Dynamics revenue grew 21% and 18% in constant currency driven by Dynamics 365 revenue growth of 39% and 37% in constant currency. The number of customers adopting multiple Dynamics 365 workloads accelerated again this quarter. LinkedIn revenue increased 23% and 22% in constant currency significantly ahead of expectations. Growth in our marketing solutions business accelerated to 53% benefiting from the stronger advertising market noted earlier. Segment gross margin dollars increased 13% and 11% in constant currency and gross margin percentage was relatively unchanged year-over-year with roughly 2 points of favorable impact from the change in accounting estimate. Operating expenses increased 4% and 3% in constant currency and operating income increased 19% and 17% in constant currency, including 5 points due to the change in accounting estimate.
Next the Intelligent Cloud segment. Revenue was $14.6 billion ahead of expectations increasing 23% and 22% in constant currency. Server products and cloud services revenue increased 26% and 24% in constant currency. Azure revenue grew 50% and 48% in constant currency driven by strong growth in our consumption based business that benefited from Improvement across industries and customer segments noted earlier.
Our per-user results were also better than expected driven by accelerated growth in our enterprise mobility and security installed base up 29% to over 163 million seats and on a strong prior year comparable that included roughly 4 points of benefit from the end of support for Windows Server 2008.
Our on-premise server business increased 4% and 3% in constant currency with strong annuity performance driven by continued demand for our hybrid and premium offerings. Enterprise services revenue grew 5% and 4% in constant currency again driven by premier support services. Segment gross margin dollars increased 29% and 27% in constant currency and gross margin percentage increased 3 points year-over-year with roughly 3 points of favorable impact from the change in accounting estimate. Operating expenses increased 12% and 11% in constant currency and operating income grew 43% and 41% in constant currency with roughly 10% favorable impact from the change and accounting estimate.
Now to More Personal Computing. Revenue was $15.1 billion increasing 14% and 13% in constant currency and better than expected performance across all businesses. In Windows, the stronger PC market resulted in overall OEM revenue growth of 1% despite a strong prior year comparable and OEM pro from the end of support for Windows 7. OEM non-pro revenue grew 24% and OEM pro revenue declined 9%. Inventory levels ended the quarter in the normal range. Windows commercial products and cloud services revenue grew 10% and 8% in constant currency driven by continued demand for Microsoft 365 and our advanced security solutions. In Surface revenue grew 3% and 1% in constant currency. Search revenue ex TAC increased 2% and 1% in constant currency benefiting from the improved advertising market noted earlier. And in Gaming revenue increased 51% And 50% in constant currency. Xbox hardware revenue grew 86% driven by the new console launch as well as the benefit from lower price promotions on our prior generation consoles. Xbox content and services revenue grew 40% and 38% in constant currency the strong growth in third party transactions, Game Pass subscribers and first-party titles. Segment gross margin dollars increased 11% and 9% in constant currency and gross margin percentage decreased 2 points year-over-year driven by sales mix shift to gaming. Operating expense decreased 10% and operating income grew 25% and 22% in constant currency.
Now back to total company results. Capital expenditures including finance leases were $5.4 billion up 20% year-over-year to support growing global demand and customer usage of our cloud services. Cash paid for PP&E was $4.2 billion. Cash flow from operations was $12.5 billion increased 17% year-over-year as strong cloud billings and collections were partially offset by payments related to a tax audit settlement. Free cash flow was $8.3 billion up 17%.
Excluding the impact of these tax payments cash flow from operations and free cash flow grew 33% and 41% respectively. Other income and expense was $440 million higher than anticipated primarily driven by net gains on investments including mark to market gains on our equity portfolio as well as net gains on foreign currency remeasurement.
Our effective tax rate was approximately 16% in line with expectations. And finally we returned $10 billion to shareholders through share repurchases and dividends; an increase of 18% year-over-year.
Now let's move to our outlook. My commentary for both the next quarter and any remarks for the full year does not include any impact from the ZeniMax acquisition which we still expect to close by the end of the fiscal year. In our commercial business, consistent execution, focus on customer success and a compelling solution portfolio in high growth markets should drive another strong quarter. In our consumer business we expect to see healthy demand for PCs and productivity tools continue. The growth rates will again be impacted by the end of support for Windows 7 last year. In Gaming, we expect continued strong engagement on the Xbox platform and significant demand for the Xbox series X and S that will still be constrained by supply and our search in LinkedIn businesses should benefit from the improving advertising market. In commercial bookings we have a growing Q3 expiry base and a low prior year comparable.
So strong execution across our core annuity sales motions and increased commitment to our cloud platform should drive healthy growth.
As a reminder an increasing mix of large long-term Azure contracts which are more unpredictable in their timing can drive quarterly volatility and the growth rates. Commercial cloud gross margin percentage increased by approximately 3.0 year-over-year again driven by the change in accounting estimate.
Excluding this impact continued improvement in Azure IaaS and PaaS gross margin will be offset by revenue make shift to Azure and continued investments to support our customer success.
We expect a sequential increase on a dollar basis to our capital expenditures as we continue to invest to meet growing global demand for our cloud services.
Now to FX. Based on current rates we expect FX to increase total company revenue COGS and operating expense growth by approximately 2 points.
Within the segments FX should increase productivity and business processes revenue growth by approximately 3 points and intelligent cloud and more personal computing revenue growth by approximately 2 points.
Now to segment guidance. In productivity and business processes we expect revenue between $13.35 billion and $13.6 billion. In Office commercial revenue growth will again be driven by Office 365 with continued upsell opportunity to E5. In our on-premise business though we anticipate continued improvement in transactional purchasing trends we expect revenue to decline in the mid to high teens range consistent with the ongoing customer shift to the cloud. In Office consumer on a strong prior year comparable revenue growth should be similar to last quarter with continued growth in Microsoft 365 subscription revenue. In LinkedIn we expect continued strong engagement on the platform to drive revenue growth in the low 20% range and in dynamics continued momentum will drive revenue growth similar to last quarter.
For Intelligent Cloud we expect revenue between $14.7 billion and $14.95 billion. In Azure revenue will again be driven by strong growth in our consumption-based business and in our per-user business we expect continued benefit from Microsoft 365 suite momentum. In our on-premise server business we expect revenue growth to be in the low to mid single digits driven by continued demand for our hybrid and premium annuity offerings on a strong prior year comparable that included the benefit from the end of support for Windows server 2008. And Enterprise services revenue growth should be roughly in line with last quarter. In More Personal Computing we expect revenue between $12.3 billion and $12.7 billion. In Windows overall OEM revenue growth should be in the low single digits on a strong comparable mentioned earlier. Windows commercial products and cloud services growth should be in the low to mid teens driven by continued demand for Microsoft 365 and our advanced security solutions. And in Surface good demand against a low prior comparable should drive growth in the mid to high teens range. In Search ex TAC growth should be driven by improvements in the advertising market and in Gaming we expect revenue growth of approximately 40% driven by next generation console sales as well as Xbox content and services revenue in the mid 20% range.
Now back to the company guidance.
We expect COGS of $13.1 billion to $13.3 billion and operating expense of $11.9 billion to $12 billion.
Another income and expense interest income and expense should offset each other.
We expect our Q3 tax rate to be approximately 15% slightly lower than our full year rate of approximately 16%. And finally, for FY21 with our strong performance in the first half of the fiscal year and our outlook for Q3 we expect to deliver another full year of double-digit revenue and operating income growth as well as healthy operating margin expansion even after excluding the impact of the change in accounting estimate and COVID related savings. In closing, we have executed well in the first half of our fiscal year in a challenging and changing environment. Investments made over quarters and often years coupled with focused execution by our teams are the drivers behind a compelling portfolio that is delivering value today for our customers and creating optimism in our roadmap for tomorrow. Satya discussed our unique, comprehensive and integrated set of products earlier on the call; products and services that span large growth markets and we will continue to invest broadly and boldly against the significant opportunities ahead of us. With that Mike, let's go to Q&A