Amy Hood
Chief Financial Officer at Microsoft
Thank you, Satya, and good afternoon, everyone. This quarter, revenue was $64.7 billion, up 15% and 16% in constant currency. Earnings per share was $2.95, an increased 10% and 11% in constant-currency. In our largest quarter of the year, we again delivered double-digit top and bottom-line growth with continued share gains across many of our businesses and record commitments to our Microsoft Cloud platform. Commercial bookings were significantly ahead of expectations and increased 17% and 19% in constant currency.
This record commitment quarter was driven by growth in the number of $10 million-plus and $100 million-plus contracts for both Azure and Microsoft 365 and consistent execution across our core annuity sales motions. Commercial remaining performance obligation increased 20% and 21% in constant-currency to $269 billion. Roughly 40% will be recognized in revenue in the next 12 months, up 18% year-over-year. The remaining portion recognized beyond the next 12 months increased 21%. And this quarter, our annuity mix was 97%. At a Company level, Activision contributed a net impact of approximately 3 points to revenue growth was a 2 point drag on operating income growth, and had a negative $0.06 impact to earnings per share.
A reminder that this net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first-party and includes $938 million from purchase accounting adjustments, integration, and transaction-related costs. FX did not have a significant impact on our results and was roughly in line with our expectations on total company revenue, segment-level revenue, COGS, and operating expense growth. Microsoft Cloud revenue was $36.8 billion and grew 21% and 22% in constant currency, roughly in line with expectations. Microsoft Cloud gross margin percentage decreased roughly 2 points year-over-year to 69%, in line with expectations.
Excluding the impact of the change in accounting estimate for useful lives, gross margin percentage decreased slightly, driven by sales mix-shift to Azure, partially offset by improvement in Azure even with the impact of scaling our AI infrastructure. Company gross margin dollars increased 14% and 15% in constant currency and gross margin percentage decreased slightly year-over-year to 70%. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly even with the impact from purchase accounting adjustments, integration, and transaction-related costs from the Activision acquisition.
Operating expenses increased 13% with 9 points from the Activision acquisition. At a total company level, headcount at the end of June was 3% higher than a year ago. Operating income increased 15% and 16% in constant currency, and operating margins were 43%, relatively unchanged year-over-year. Excluding the impact of the change in accounting estimate, operating margins increased slightly driven by the higher gross margin noted earlier, and improved operating leverage through continued cost discipline.
Now to our segment results. Revenue from Productivity and Business Processes was $20.3 billion and grew 11% and 12% in constant currency, slightly ahead of expectations, driven by better-than-expected results across all business units. Office Commercial revenue grew 12% and 13% in constant currency. Office 365 Commercial revenue increased 13% and 14% in constant currency with ARPU growth primarily from E5 momentum as well as Copilot for Microsoft 365.
Paid Office 365 Commercial seats grew 7% year-over-year, with installed base expansion across all customer segments. Seat growth was again driven by our small and medium business and frontline worker offerings, although both segments continued to moderate. Office Commercial licensing declined 9% and 7% in constant currency with continued customer shift to Cloud offerings.
Office consumer revenue increased 3% and 4% in constant currency, with continued momentum in Microsoft 365 subscriptions, which grew 10% to $82.5 million. LinkedIn revenue increased 10% and 9% in constant currency, driven by better-than-expected performance across all businesses. Dynamics revenue grew 16%, driven by Dynamics 365, which grew 19% and 20% in constant currency. We saw continued growth across all workloads and better-than-expected new business. Dynamics 365 now represents roughly 90% of total Dynamics revenue.
Segment gross margin dollars increased 9% and 10% in constant currency, and gross margin percentage decreased roughly 1 point year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage decreased slightly, driven by Office 365 as we scale our AI infrastructure. Operating expenses increased 5%, and operating income increased 12% and 13% in constant currency.
Next, the Intelligent Cloud segment. Revenue was $28.5 billion, increasing 19% and 20% in constant currency, in line with expectations. Overall, Server products and Cloud services revenue grew 21% and 22% in constant currency. Azure and other cloud services revenue grew 29% and 30% in constant currency, in line with expectations and consistent with Q3 when adjusting for the leap year.
Azure growth included 8 points from AI services, where demand remained higher than our available capacity. In June, we saw slightly lower-than-expected growth in a few European geos. In our per-user business, the enterprise mobility and security installed base grew 10% to over 281 million seats, with continued impact from moderated growth in seats sold outside the Microsoft 365 suite. Therefore, our Azure consumption business continues to grow faster than total Azure.
In our on-premises server business, revenue increased 2% and 3% in constant currency. Growth was driven by demand for our hybrid solutions, although with slightly lower-than-expected transactional purchasing. Enterprise and Partner Services revenue decreased 7% on a strong prior year comparable for enterprise support services. Segment gross margin dollars increased 16% and gross margin percentage decreased roughly 2 points year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage decreased slightly, driven by sales mix shift to Azure, partially offset by the improvement in Azure noted earlier, even with the impact of scaling our AI infrastructure. Operating expenses increased 5%, and operating income grew 22% and 23% in constant currency.
Now to More Personal Computing. Revenue was $15.9 billion, increasing 14% and 15% in constant currency, with 12 points of net impact from the Activision acquisition. Results were above expectations, driven by Windows Commercial and Search. The PC market was as expected and Windows OEM revenue increased 4% year-over-year. Windows Commercial products and Cloud services revenue increased 11% and 12% in constant currency, ahead of expectations due to higher in-period revenue recognition from the mix of contracts. Devices revenue decreased 11% and 9% in constant currency, roughly in line with expectations as we remain focused on our higher-margin premium products.
While early days, we're excited about the recent launch of our Copilot+ PCs. Search and News advertising revenue ex-TAC increased 19%, ahead of expectations, primarily due to improved execution. Healthy volume growth was driven by Bing and Edge. And in Gaming, revenue increased 44% with 48 points of net impact from the Activision acquisition. Xbox content and services revenue increased 61%, slightly ahead of expectations with 58 points of net impact from the Activision acquisition.
Stronger-than-expected performance in first-party content was partially offset by third-party content performance. Xbox hardware revenue decreased 42% and 41% in constant currency. Segment gross margin dollars increased 21% with 10 points of net impact from the Activision acquisition. Gross margin percentage increased roughly 3 points year-over-year, primarily driven by sales mix shift to higher-margin businesses. Operating expenses increased 43% with 41 points from the Activision acquisition, operating income increased 5% and 6% in constant currency.
Now back to total company results. Capital expenditures, including finance leases, were $19 billion, in line with expectations and cash paid for PP&E was $13.9 billion. Cloud and AI-related spend represents nearly all of our total capital expenditures. Within that, roughly half is for infrastructure needs where we continue to build and lease data centers that will support monetization over the next 15 years and beyond. The remaining Cloud and AI-related spend is primarily for servers, both CPUs and GPUs to serve customers based on demand signals. For the full fiscal year, the mix of our Cloud and AI-related spend was similar to Q4.
Cash flow from operations was $37.2 billion, up 29% driven by strong Cloud billings and collections. Free cash flow was $23.3 billion, up 18% year-over-year, reflecting higher capital expenditures to support our Cloud and AI offerings. For the full year, cash flow from operations surpassed $100 billion for the first time, reaching $119 billion.
This quarter, other income expense was negative $675 million more favorable than anticipated with lower-than-expected interest expense and higher-than-expected interest income. Our losses on investments accounted for under the equity method were as expected. Our effective tax rate was approximately 19%, higher than anticipated due to a state tax law signed in June that was affected retroactively.
And finally, we returned $8.4 billion to shareholders through dividends and share repurchases, bringing our total cash return to shareholders to over $34 billion for the full fiscal year.
Now moving to our outlook. My commentary for both the full year and next quarter is on a U.S. dollar basis unless specifically noted otherwise. Let me start with some full-year commentary for FY '25.
First, FX. Assuming current rates remain stable, we expect FX to have no meaningful impact to full-year revenue, COGS, or operating expense growth. Next, we continue to expect double-digit revenue and operating income growth as we focus on delivering differentiated value for our customers. To meet the growing demand signal for our AI and Cloud products, we will scale our infrastructure investments with FY '25 capital expenditures expected to be higher than FY '24.
As a reminder, these expenditures are dependent on demand signals and adoption of our services that will be managed through the year. As scaling these investments drives growth in COGS, we will remain disciplined on operating expense management. Therefore, we expect FY '25 OpEx growth to be in the single digits. And given our focused commitment to managing at the operating margin level, we still expect FY '25 operating margins to be down only about 1 point year-over-year. And finally, we expect our FY '25 effective tax rate to be around 19%.
Now to the outlook for our first quarter. Based on current rates, we expect FX to decrease total revenue and segment-level revenue growth by less than 1 point. We expect FX to decrease COGS growth by less than 1 point and to have no meaningful impact to operating expense growth.
In Commercial bookings, increased long-term commitments to our platform and strong execution across core annuity sales motions should drive healthy growth on a growing expiry base. As a reminder, larger long-term Azure contracts, which are more unpredictable in their timing, can derive increased quarterly volatility in our bookings growth rate.
Microsoft Cloud gross margin percentage should be roughly 70%, down year-over-year, driven by the impact of scaling our AI infrastructure. We expect capital expenditures to increase on a sequential basis given our Cloud and AI demand as well as existing AI capacity constraints. As a reminder, there can be quarterly spend variability from Cloud infrastructure build-outs and the timing of delivery of finance leases.
Next is segment guidance. In Productivity and Business Processes, we expect revenue to grow between 10% and 11% in constant currency, or $20.3 billion to $20.6 billion. In Office Commercial, revenue growth will again driven by Office 365 with seat growth across customer segments and ARPU growth through E5 and Copilot for Microsoft 365. We expect Office 365 revenue growth to be approximately 14% in constant currency.
In our on-premises business, we expect revenue to decline in the mid-to-high teens. In Office Consumer, we expect revenue growth in the low to mid-single digits, driven by Microsoft 365 subscriptions. For LinkedIn, we expect revenue growth in the high single digits driven by continued growth across all businesses. And in Dynamics, we expect revenue growth in the low to mid-teens, driven by Dynamics 365. For Intelligent Cloud, we expect revenue to grow between 18% and 20% in constant currency, or $28.6 billion to $28.9 billion.
Revenue will continue to be driven by Azure, which, as a reminder, can have quarterly variability primarily from our per-user business and in-period revenue recognition depending on the mix of contracts. In Azure, we expect Q1 revenue growth to be 28% to 29% in constant currency. Growth will continue to be driven by our consumption business, inclusive of AI, which is growing faster than total Azure. We expect the consumption trends from Q4 to continue through the first half of the year. This includes both AI demand impacted by capacity constraints and non-AI growth trends similar to June. Growth in our per-user business will continue to moderate.
And in H2, we expect Azure growth to accelerate as our capital investments create an increase in available AI capacity to serve more of the growing demand.
In our on-premises server business, we expect revenue to decline in the low single digits as continued hybrid demand will be more than offset by lower transactional purchasing. And in Enterprise and Partner Services revenue should decline in the low single digits. And More Personal Computing, we expect revenue to grow between 9% and 12% in constant currency or $14.9 billion to $15.3 billion. Windows OEM revenue growth should be relatively flat, roughly in line with the PC market.
In Windows Commercial products and Cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the mid-single digits. As a reminder, our quarterly revenue growth can have variability primarily from in-period revenue recognition depending on the mix of contracts. In Devices, revenue growth should be in the low to mid-single digits. Search and News advertising ex-TAC revenue growth should be in the mid-to-high teens. This will be higher than overall Search and News advertising revenue growth, which we expect to be in the low single digits.
And in gaming, we expect revenue growth in the mid-30s, including approximately 40 points of net impact from the Activision acquisition. We expect Xbox content and services revenue growth in the low to mid-50s, driven by the net impact from the Activision acquisition. Hardware revenue will again decline year-over-year.
Now back to Company guidance. We expect COGS between $19.95 billion to $20.15 billion, including approximately $700 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition. We expect operating expense of $15.2 billion to $15.3 billion, including approximately $200 million from purchase accounting, integration, and transaction-related costs from the Activision acquisition.
Other income and expense should be roughly negative $650 million, driven by losses on investments accounted for under the equity method as interest income will be mostly offset by interest expense. As a reminder, we are required to recognize gains or losses on our equity investments, which can increase quarterly volatility. We expect our Q1 effective tax rate to be approximately 19%.
In closing, we remain focused on delivering innovations that matter to our global customers of every size. That focus extends to delivering on our financial commitments as well. We delivered operating margin growth of nearly 3 points year-over-year even as we accelerate our AI investments, completed the Activision acquisition, and had a headwind from the change in useful lives last year.
So as we begin FY '25, we will continue to invest in the Cloud and AI opportunity ahead, aligned and if needed, adjusted to the demand signals we see. We are committed to growing our leadership across our Commercial Cloud and within that, the AI platform, and we feel well positioned as we start FY '25.
With that, let's go to Q&A, Brett.
