Amy Hood
Chief Financial Officer at Microsoft
Thank you, Satya. And good afternoon everyone. Our first quarter revenue was $45.3 billion, up 22% and 20% in constant currency. Earnings per share was $2.27 and increased 25% and 23% in constant currency when adjusted for a net tax benefit of $3.3 billion related to the transfer of intangible properties this quarter. Our sales teams and partners delivered a strong start to the fiscal year. In our commercial business, customers continue to choose the Microsoft Cloud. We again saw healthy growth in our Azure consumption based business and increased usage across products such as Teams and Power Platform, as Satya reflected in his comments.
In our on-premises business, annuity performance in Office and Server benefited from a greater than expected mix of contracts with higher in-period revenue recognition and in LinkedIn, the Talent Solutions business continued to benefit from an improved job market. In our Consumer business, Windows OEM performance was better than expected in a growing PC market despite ongoing supply chain constraints. We also saw positive demand signals for Windows 11 ahead of March, with nearly all devices built this quarter eligible for upgrade. Microsoft 365 subscription growth drove Office Consumer results. Advertising market growth drove another strong quarter in LinkedIn, as well as search and news advertising. And in gaming, we were able to ship more Xbox Series X and S consoles than expected even as demand continues to exceed supply.
Let's move to our overall results. Against the strong prior-year comparable, commercial bookings grew 11% and 14% in constant currency, driven by a consistent execution across new, add-on and renewal sales motions. This quarter growth was impacted by fewer large long-term Azure contracts, which were unpredictable in their timing. As a result, commercial remaining performance obligation increased 28% and 29% in constant currency to $137 billion with a roughly equivalent split between revenue that we recognized within and the portion beyond the next 12 months. And our annuity mix increased 2 points year-over-year to 95%.
Microsoft Cloud revenue grew 36% and 34% in constant currency to $20.7 billion, ahead of expectations. Microsoft Cloud gross margin percentage decreased slightly year-over-year to 71%. Excluding the impact from a change in accounting estimate for the useful life of server and network equipment assets, Microsoft cloud gross margin percentage increased roughly 4 points, driven by improvement in our cloud services, particularly in Azure and Office 365, partially offset by sales mix shift to Azure.
With the weaker U.S. dollar, FX increased total company Productivity and Business Processes and Intelligent Cloud revenue growth by 2 points, in line with expectations. More Personal Computing revenue growth was increased by 1 point from FX less favorable than expected. FX increased cost by 1 point in line with expectations and had no impact to operating expense, slightly more favorable than expected. Gross margin dollars increased 21% and 19% in constant currency. Gross margin percentage was 70%, down slightly year-over-year. Excluding the impact of the change in accounting estimate discussed earlier, gross margin percentage increased roughly 1 point driven by improvements in cloud services noted earlier, partially offset by sales mix shift to cloud.
Operating expense increased 11% lower than expected, primarily driven by investments that shifted to future quarters. At a total company level, head count grew 14% year-over-year as we continue to invest in key areas such as cloud engineering, sales, customer deployment and gaming. Operating income increased 27% and 24% in constant currency and operating margins expanded 2 points year-over-year to 45%. Excluding the impact of the change in accounting estimate, operating margins expanded roughly 4 points year-over-year.
Now to our segment results. Revenue from Productivity and Business Processes was $15 billion and grew 22% and 20% in constant currency, with better than expected performance in Office Commercial and LinkedIn. Office Commercial revenue grew 18% and 16% in constant currency, Office 365 Commercial revenue grew 23% and 21% in constant currency, driven by installed base expansion across all workloads and all customer segments, as well as higher ARPU. Demand for our advanced security, compliance and voice offerings drove continued momentum in E5 revenue this quarter. Paid Office 365 Commercial seats increased 17% year-over-year, driven by another strong quarter of growth in our small and medium business and frontline worker offerings.
Office Commercial licensing increased 13% and 14% in constant currency, significantly ahead of expectations, benefiting from the higher in-period revenue recognition noted earlier. Office Consumer revenue grew 10% and 8% in constant currency on a strong prior-year comparable, with better than expected growth in Microsoft 365 subscriptions. Over the past two years, our Microsoft 365 subscriber base has grown over 50%, reaching $54.1 million this quarter. Dynamics revenue grew 31% and 29% in constant currency. Dynamics 365 revenue growth was 48% and 45$ in constant currency, with continued strong demand for Power Apps which grew 202% and 197% in constant currency.
And in LinkedIn, revenue increased 42% at 39% in constant currency, with continued strength in marketing solutions and better than expected performance in Talent Solutions from the improved job market earlier. Segment gross margin dollars increased 22% and 20% 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 improvement across all cloud services. Operating expense increased 7% and operating income increased 33% and 29% in constant currency.
Next, the Intelligent Cloud segment. Revenue was $17 billion, increasing 31% and 29% in constant currency, ahead of expectations, driven by continued customer demand for our differentiated hybrid and cloud offerings. Overall server products and cloud services revenue increased 35% and 33% in constant currency. Azure and other cloud services grew 50% and 48% in constant currency, ahead of expectations, driven by our consumption-based services. And our per-user business, the Enterprise Mobility and Security installed base grew 30% to over 196 million seats.
In our on-premises business on a low prior-year comparable, revenue increased 14% and 13% in constant currency, ahead of expectations. Strength in our annuity business was driven by healthy demand for our hybrid offerings that include Windows Server and SQL server running in multi-cloud environments and higher in-period revenue recognition including benefit from annuity purchasing ahead of the Windows Server 2022 launch.
Enterprise Services revenue grew 9% and 8% in constant currency, driven by growth in Microsoft Consulting Services and Enterprise Support Services. Segment gross margin dollars increased 28% and 26% in constant currency and gross margin percentage decreased roughly 1 point year-over-year. Excluding the impact of the change in accounting estimates, gross margin percentage increased roughly 2 points, driven by improvements in Azure, partially offset by sales mix shift to Azure. Operating expense increased 13% and 12% in constant currency and operating income grew 39% and 37% in constant currency.
Now to More Personal Computing. Revenue was $13.3 billion, increasing 12% and 11% in constant currency, with better than expected performance in Windows OEM and gaming. Windows OEM revenue increased 10%, driven by a stronger than expected PC market, particularly in the commercial segment, which has higher revenue per license. These results include roughly 7 points of impact from the $210 million revenue deferral related to Windows 11 licenses sold to OEMs prior to general availability. The deferral was lower than expected OEMs prioritized upgraded eligible device builds early in the quarter. Windows Commercial products and cloud services revenue grew 12% and 10% in constant currency, driven by demand for Microsoft 365.
Surface revenue declined 17% and 19% in constant currency on a strong prior-year comparable. Search and news -- advertising revenue ex TAC increased 40% and 39% in constant currency in line with expectations, benefiting from the advertising market noted earlier. And in Gaming revenue increased 16% at 14% in constant currency, ahead of expectations. Better than expected console supply and continued strong demand resulted in Xbox hardware revenue growth of 166% and 162% in constant currency. Xbox content and services revenue increased 2% and was relatively unchanged in constant currency against a strong prior-year comparable.
Segment gross margin dollars increased 10% and 8% in constant currency. Gross margin percentage decreased roughly 1 point year-over-year, driven by sales mix shift to gaming hardware. Operating expenses increased 15%, driven by the ZeniMax acquisition as well as Windows 11 marketing. Operating income grew 7% and 5% in constant currency. Now back to total company results. Capital expenditures, including finance leases were $7.4 billion in line with expectations and cash paid for PP&E was $5.8 billion. Our capital investments, including both new data center regions and expansion in existing regions continue to be based on significant customer demand and usage signals.
Cash flow from operations was $24.5 billion, increasing 27% year-over-year, driven by strong cloud billings and collections. Free cash flow was $18.7 billion, up 30% year-over-year. This quarter other income and expense was $286 million, higher than anticipated, primarily driven by net gains on investments. As a reminder, we are required to recognize mark-to-market gains or losses on our equity portfolio. Our non-GAAP effective tax rate was approximately 16% and finally, we returned $10.9 billion to shareholders through share repurchases and dividends.
Now, before we turn to our outlook. I'd like to provide a couple of reminders. First, the outlook we give is unless specifically noted otherwise is on a U.S. dollar basis. Second, my remarks for the next quarter do not include the impact from the Nuance acquisition, which we now expect to close by the end of Q2 or early Q3. With that, let's move to our second quarter outlook. In our commercial business, our differentiated market position, compelling solution portfolio and consistent execution should drive another strong quarter. Commercial bookings growth should again be healthy, but impacted by modest growth in the Q2 expiry base and the normal quarterly volatility from large long-term Azure contracts previously discussed.
Microsoft Cloud gross margin percentage could decrease roughly 2 points year-over-year, excluding the impact of the change in accounting estimate previously discussed. Q2 gross margin percentage will increase roughly 2 points, driven by continued improvement across our cloud services and site revenue mix shift to Azure. Longer-term, we expect the Microsoft Cloud gross margin percentage to be impacted by revenue mix shift to Azure, increased usage of our Microsoft cloud services and ongoing strategic investments to support our customers' success. And on a dollar basis, we expect capital expenditures to be roughly in line with last quarter as we continue to invest to support growing demand.
Now the FX. Based on current rates, we expect FX to increase revenue at the total company and all individual segment levels by approximately 1 point and have no impact on total COGS or operating expense growth. Next to segment guidance. In Productivity and Business Processes, we expect revenue between $15.7 and $15.95 billion. In Office Commercial revenue growth will again be driven by Office 365 with healthy seat growth across customer segments and continued momentum in E5. In our on-premises business, we expect revenue to decline in the high teens, consistent with the ongoing customer shift to the cloud. In Office Consumer, we expect revenue to grow in the mid-teens with continued momentum in Microsoft 365 consumer subscriptions.
For LinkedIn, a strong job market and continued engagement on the platform should drive revenue growth in the mid 30% range. And in Dynamics, we expect revenue growth similar to Q1, driven by strength in Dynamics 365, including continued momentum in Power Apps. For Intelligent Cloud, we expect revenue between $18.1 billion and $18.35 billion. Revenue will continue to 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 Q2, we expect healthy broad-based growth in our Azure consumption business consistent with recent trends and our per-user business while continuing to benefit from Microsoft 365 Suite momentum, should see a moderation in growth rates given the size of the installed base. In our on-premises server business, on a higher prior-year comparable, we expect revenue growth in the mid-single digits, driven by continued demand for our hybrid solutions. In Enterprise Services, we expect revenue growth to be in the high single digits.
In More Personal Computing, we expect revenue between $16.35 billion and $16.75 billion despite ongoing supply chain constraints. OEM revenue should grow low to mid-teens, including 6 points of impact from the $210 billion Windows 11 deferral that shifted revenue from Q1 to Q2. In Windows Commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive low double-digit growth. In Surface, we expect revenue to decline single digits as we continue to work through supply chain uncertainty, particularly in our premium devices. In Search and News Advertising ex TAC, we expect revenue growth in the low to mid 20s. If supply chain uncertainty reduces advertising budgets, our results would be negatively impacted.
And in gaming, on a high prior-year comparable that included the launch of our new consoles and strength across Xbox content and services, we expect revenue growth in the high single digits. Console sales will continue to be impacted by supply chain uncertainty. And in Xbox content services, we expect revenue growth in the mid-teens with strong engagement on the Xbox platform in a holiday quarter that will include several AAA title launches. Now back to company guidance. We expect COGS of $17 billion to $17.2 billion and operating expense of $12.7 billion to $12.8 billion dollars. In other income and expense, interest income and expense should offset each other.
And finally, we expect our Q2 effective tax rate to be approximately 17%. In closing, we are off to a strong start in FY '22 with tremendous opportunity to drive sustained long-term revenue growth. We remain focused on growing high value users across our differentiated Microsoft cloud offerings and delivering exciting new consumer experiences with Windows 11, Surface and our Xbox gaming platform as we enter the holiday season. Our consistent approach to investing for these and other future opportunities, while continuing to deliver solid operating performance, will drive strong results throughout FY '22 and beyond.
Now, Brett, let's go to Q&A.
