Amy Hood
Executive Vice President and Chief Financial Officer at Microsoft
Thank you, Satya, and good afternoon, everyone. This quarter, revenue was $56.5 billion, up 13% and 12% in constant currency. Earnings per share was $2.99 and increased 27% and 26% in constant currency. Consistent execution by our sales teams and partners drove a strong start to the fiscal year. Results exceeded expectations, and we saw share gains again this quarter across many businesses as customers adopt our innovative solutions to transform their businesses.
In our commercial business, the trends from the prior quarter continued. We saw healthy renewals, particularly in Microsoft 365 E5, and growth of new business continued to be moderated for stand-alone products sold outside the Microsoft 365 suite. In Azure, as expected, the optimization trends were similar to Q4. Higher-than-expected AI consumption contributed to revenue growth in Azure.
In our consumer business, PC market unit volumes are returning to pre-pandemic levels. Advertising spend landed roughly in line with our expectations. And in gaming, strong engagement helped by the Starfield launch benefited Xbox content and services. Commercial bookings increased 14% and 17% in constant currency, in line with expectations, primarily driven by strong execution across our core annuity sales motion with continued growth in the number of $10 million-plus contracts for both Azure and Microsoft 365.
Commercial remaining performance obligation increased 18% to $212 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 15% year-over-year. The remaining portion, which will be recognized beyond the next 12 months, increased 20%. And this quarter, our annuity mix was 96%. 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 $31.8 billion and grew 24% and 23% in constant currency, ahead of expectations. Microsoft Cloud gross margin percentage increased slightly year-over-year to 73%, 1 point better than expected, primarily driven by improvement in Azure. Excluding the impact of the change in accounting estimate for useful lives, Microsoft Cloud gross margin percentage increased roughly 2 points driven by the improvement just mentioned in Azure as well as Office 365, partially offset by the impact of scaling our AI infrastructure to meet growing demand.
Company gross margin dollars increased 16% and 15% in constant currency, and gross margin percentage increased year-over-year to 71%. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 3 points driven by the improvement in Azure and Office 365 as well as sales mix shift to higher-margin businesses.
Operating expenses increased 1%, lower than expected due to cost efficiency focus as well as investments that shifted to future quarters. Operating expense growth was driven by marketing, LinkedIn and cloud engineering, partially offset by devices. At a total company level, head count at the end of September was 7% lower than a year ago.
Operating income increased 25% and 24% in constant currency. Operating margins increased roughly 5 points year-over-year to 48%. Excluding the impact of the change in accounting estimate, operating margins increased roughly 6 points driven by improved operating leverage through cost management and the higher gross margin noted earlier. Now to our segment results.
Revenue from Productivity and Business Processes was $18.6 billion and grew 13% and 12% in constant currency, ahead of expectations, driven by better-than-expected results in Office 365 Commercial and LinkedIn. Office Commercial revenue grew 15% and 14% in constant currency. Office 365 Commercial revenue increased 18% and 17% in constant currency, slightly better than expected with a bit more in-period revenue recognition, while billings remained relatively in line with expectations.
Growth continues to be driven by healthy renewal execution and ARPU growth as E5 momentum remains strong. Paid Office 365 Commercial seats grew 10% 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 with continued impact from the growth trends in new stand-alone business noted earlier.
Office Commercial licensing declined 17%, in line with the 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 18% to $76.7 million. LinkedIn revenue increased 8%, ahead of expectations, driven by slightly better-than-expected performance across all businesses.
Growth was driven by Talent Solutions, though we continue to see negative year-over-year bookings there from the weaker hiring environment in key verticals. Dynamics revenue grew 22% and 21% in constant currency driven by Dynamics 365, which grew 28% and 26% in constant currency with continued growth across all workloads.
Segment gross margin dollars increased 13% and gross margin percentage increased slightly year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 1 point driven by improvement in Office 365. Operating expenses increased 2% and operating income increased 20% and 19% in constant currency.
Next, the Intelligent Cloud segment. Revenue was $24.3 billion, increasing 19% and ahead of expectations with better-than-expected results across all businesses. Overall, server products and cloud services revenue grew 21%. Azure and other cloud services revenue grew 29% and 28% in constant currency, including roughly 3 points from AI services.
While the trends from prior quarter continued, growth was ahead of expectations primarily driven by increased GPU capacity and better-than-expected GPU utilization of our AI services as well as slightly higher-than-expected growth in our per-user business. In our per-user business, the Enterprise Mobility and Security install base grew 11% to over 259 million seats with continued impact from the growth trends in new stand-alone business noted earlier.
In our on-premises server business, revenue increased 2%, ahead of expectations, driven primarily by demand in advance of Windows Server 2012 end of support. Enterprise and Partner Services revenue increased 1% and was relatively unchanged in constant currency, ahead of expectations, driven by better-than-expected performance in Enterprise Support Services.
Segment gross margin dollars increased 20% and 19% in constant currency, and gross margin percentage increased slightly. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 2 points driven by the improvement in Azure noted earlier, even as we scale our AI infrastructure to meet growing demand. Operating expenses increased 2% and 1% in constant currency. Operating income grew 31% and 30% in constant currency. Now to More Personal Computing.
Revenue was $13.7 billion, increasing 3% and 2% in constant currency, above expectations with better-than-expected results across all businesses. Windows OEM revenue increased 4% year-over-year, significantly ahead of expectations, driven by stronger-than-expected consumer channel inventory build and the stabilizing PC market demand noted earlier, particularly in commercial.
Windows Commercial products and cloud services revenue increased 8% driven by demand for Microsoft 365 E5. Devices revenue decreased 22%, ahead of expectations due to stronger execution in the commercial segment. Search and news advertising revenue ex TAC increased 10% and 9% in constant currency, slightly ahead of expectations. We saw increased engagement on Bing and Edge share gains again this quarter, although search revenue growth continues to be impacted by a third-party partnership.
And in gaming. Revenue increased 9% and 8% in constant currency, ahead of expectations, driven by better-than-expected subscriber growth in Xbox Game Pass as well as first-party content primarily due to the Starfield launch. Xbox content and services revenue increased 13% and 12% in constant currency, and Xbox hardware revenue declined 7% and 8% in constant currency. Segment gross margin dollars increased 13% and 12% in constant currency, and gross margin percentage increased roughly 5 points year-over-year driven primarily by sales mix shift to higher-margin businesses. Operating expenses declined 1%, and operating income increased 23% and 22% in constant currency. Now back to total company results.
Capital expenditures, including finance leases, were $11.2 billion to support cloud demand, including investments to scale our AI infrastructure. Cash paid for PP&E was $9.9 billion. Cash flow from operations was $30.6 billion, up 32% year-over-year driven by strong cloud billings and collections. Free cash flow was $20.7 billion, up 22% year-over-year. This quarter, other income and expense was $389 million, higher than anticipated, driven by interest income, partially offset by net losses on investments and foreign currency remeasurement. Our effective tax rate was approximately 18%. And finally, we returned $9.1 billion to shareholders through share repurchases and dividends.
Now moving to our Q2 outlook, which unless specifically noted otherwise, is on a U.S. dollar basis. The Activision acquisition closed on October 13. So, my commentary includes the net impact of the deal from the date of acquisition. Our outlook includes purchase accounting impact, integration and transaction-related expenses based on our current understanding of the purchase price allocation and related deal accounting. The net impact includes adjusting for the movement of Activision content from our prior relationship as a third-party partner to first party.
Now to FX. Based on current rates, we expect FX to increase total revenue and segment-level revenue growth by approximately 1 point. We expect FX to have no impact to COGS and operating expense growth. In commercial bookings, we expect consistent execution across our core annuity sales motion, including healthy renewals, but growth will be impacted by a low-growth expiry base. Therefore, we expect bookings growth to be relatively flat. Microsoft Cloud gross margin percentage should be relatively flat year-over-year. Excluding the impact from the accounting estimate change, Q2 cloud gross margin percentage will be up roughly 1 point primarily driven by improvement in Azure and Office 365, partially offset by the impact of scaling our AI infrastructure to meet growing demand. We expect capital expenditures to increase sequentially on a dollar basis driven by investments in our cloud and AI infrastructure. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.
Next to segment guidance. In Productivity and Business Processes, we expect revenue to grow between 11% and 12% or $18.8 billion to $19.1 billion. Growth in constant currency will be approximately 1 point lower. In Office Commercial, revenue growth will again be driven by Office 365 with seat growth across customer segments and ARPU growth through E5. We expect Office 365 revenue growth to be up roughly 16% in constant currency. We're excited for Microsoft 365 Copilot general availability on November 1 and expect the related revenue to grow gradually over time. In our on-premise business, we expect revenue to decline in the mid- to high teens.
In Office Consumer, we expect revenue growth in the mid-single digits driven by Microsoft 365 subscriptions. For LinkedIn, we expect revenue growth in the mid-single digits driven by Talent Solutions and Marketing Solutions. Growth continues to be impacted by the overall market environments for recruiting and advertising, especially in the technology industry, where we have significant exposure. And in Dynamics, we expect revenue growth in the high teens driven by Dynamics 365.
For Intelligent Cloud, we expect revenue to grow between 17% and 18% or $25.1 billion to $25.4 billion. Revenue growth in constant currency will be approximately 1 point lower. Revenue will continue to be driven by Azure, which, as a reminder, can have quarterly variability primarily from our per-user business and from in-period revenue recognition, depending on the mix of contracts.
In Azure, we expect revenue growth to be 26% to 27% in constant currency with an increasing contribution from AI. Growth continues to be driven by Azure consumption business, and we expect the trends from Q1 to continue into Q2. Our per-user business should continue to benefit from Microsoft 365 suite momentum, though we expect continued moderation in seat growth rates given the size of the installed base.
For H2, assuming the optimization and new workload trends continue and with the growing contribution from AI, we expect Azure revenue growth in constant currency to remain roughly stable compared to Q2. In our on-premises server business, we expect revenue growth to be roughly flat with continued hybrid demand, particularly from licenses running in multi-cloud environments. In Enterprise and Partner Services, revenue should decline low to mid-single digits.
Now to More Personal Computing, which includes the net impact from the Activision acquisition. We expect revenue of $16.5 billion to $16.9 billion. Windows OEM revenue growth should be mid- to high single digits with PC market unit volumes expected to look roughly similar to Q1. In devices, revenue should decline in the mid-teens as we continue to focus on our higher-margin premium products. In Windows Commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive revenue growth in the low to mid-teens.
Search and news advertising ex TAC revenue growth should be mid-single digits with roughly 4 points of negative impact from a third-party partnership. Growth should be driven by volume strength supported by Edge browser share gains and increasing Bing engagement as we expect the advertising spend environment to be similar to Q1. Reminder that this ex-TAC growth will be roughly 4 points higher than overall search and news advertising revenue.
And in gaming, we expect revenue growth in the mid- to high 40s. This includes roughly 35 points of net impact from the Activision acquisition, which, as a reminder, includes adjusting for the third-party to first-party content change noted earlier. We expect Xbox content and services revenue growth in the mid to high 50s driven by roughly 50 points of net impact from the Activision acquisition. Now back to company guidance.
We expect COGS between $19.4 billion to $19.6 billion, including approximately $500 million of amortization of acquired intangible assets from the Activision acquisition. We expect operating expense of $15.5 billion to $15.6 billion, including approximately $400 million from purchase accounting adjustments, integration and transaction-related costs from the Activision acquisition.
Other income and expense should be roughly negative $500 million as interest income will be more than offset by interest expense primarily due to a reduction in our investment portfolio balance and the issuance of short-term debt, both for the Activision acquisition. As a reminder, we are required to recognize gains or losses on our equity investments, which can increase quarterly volatility. We expect our Q2 effective tax rate to be between 19% and 20%.
Now some additional thoughts on H2 as well as the full fiscal year. First, FX. Assuming current rates remain stable, we expect FX to have no meaningful impact to full year revenue COGS or operating expense growth. Therefore, in H2, we expect FX to decrease revenue COGS and operating expense growth by 1 point.
Second, Activision. We expect approximately $900 million for purchase accounting adjustments as well as integration and transaction-related costs in each quarter in H2. For our full FY '24, we remain committed to investing for the cloud and AI opportunity while also maintaining our disciplined focus on operating leverage. Therefore, as we add the net impact of Activision, inclusive of purchase accounting adjustments as well as integration and transaction-related expenses, we continue to expect full year operating margins to remain flat year-over-year.
In closing, with our strong start to FY '24, I am confident that as a team, we will continue to deliver healthy growth in the year ahead driven by our leadership in commercial cloud and our commitment to lead the AI platform wave.
With that, let's go to Q&A, Brett.