Amy Hood
Executive Vice President and Chief Financial Officer at Microsoft
Thank you, Satya. And good afternoon, everyone. This quarter, revenue was $51.7 billion, up 20% year-over-year. Earnings per share was 2.48, increasing 22%. The US dollar strengthened during the quarter. And as a result, FX had no impact on total company and segment revenue growth, which was a 1-point headwind compared to expectations. Despite this, we delivered another quarter of strong double-digit revenue growth in each of our business segments, reflecting our unique and differentiated market position across a connected portfolio of diverse businesses.
In our commercial business, strong execution by our sales teams and partners, combined with continued demand for our Microsoft Cloud offerings, drove significant growth in large, long-term Azure contracts as well as increased usage of Teams and our advanced security and identity offerings. And in LinkedIn, Talent Solutions benefited from a strong job market again this quarter.
In our consumer business, increased PC demand and usage, as Satya highlighted, benefited our Windows OEM business. Continued advertising market growth drove another strong quarter in LinkedIn Marketing Solutions as well as Search and news advertising. And in a strong holiday quarter for gaming, we saw record revenue and engagement on the platform, with significant growth in Game Pass subscribers and first-party titles as well as continued demand for Xbox Series X and S consoles.
Now to our overall results. Commercial bookings grew 32% and 37% in constant currency, significantly ahead of expectations, driven by the large, long-term Azure contracts noted earlier and strong execution across our core annuity sales motions. Commercial remaining performance obligation increased 31% and 32% in constant currency to $147 billion. Roughly 45% will be recognized in revenue in the next 12 months, up 26% year-over-year. The remaining portion, which will be recognized beyond the next 12 months, increased 37% year-over-year, highlighting the long-term commitment customers are making to our Microsoft Cloud. And our annuity mix increased 1 point year-over-year to 94%.
Microsoft Cloud revenue grew 32% to $22.1 billion, again ahead of our expectations. Microsoft Cloud gross margin percentage decreased slightly year-over-year to 70%. Excluding the impact from the change in accounting estimate for the useful life of server and network equipment assets, Microsoft Cloud gross margin percentage increased roughly 3 points, driven by improvement across our cloud services, partially offset by sales mix shift to Azure.
As noted earlier, with the strengthening of the US dollar through the quarter, FX had no company or segment revenue growth impact, and minimal impact on COGS and operating expense growth. Gross margin dollars increased 20%. Gross margin percentage was 67%, relatively unchanged year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly 2 points, driven primarily by the improvement in our cloud services noted earlier.
Operating expense increased 14%, lower than expected, primarily driven by investments that shifted to future quarters. At a total company level, headcount grew 16% year-over-year as we continue to invest in key areas such as cloud engineering, sales, customer deployment, gaming and LinkedIn. Operating income increased 24% and operating margins expanded 1 point year-over-year to 43%. Excluding the impact of the change in accounting estimate, operating margins expanded roughly 3 points year-over-year.
Now to our segment results. Revenue from Productivity and Business Processes was $15.9 billion and grew 19% year-over-year, which included a 1-point FX headwind relative to expectations. Excluding this headwind, revenue exceeded expectations driven by LinkedIn.
Office commercial revenue grew 14%. Office 365 commercial revenue growth of 19% was driven by installed base expansion across all workloads and 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 16% year-over-year, driven by another strong quarter of growth in our small and medium business and frontline worker offerings.
Office commercial licensing decreased 17%, in line with expectations and consistent with the ongoing customer shift to the cloud. Office consumer revenue grew 15%, driven by continued momentum in Microsoft 365 subscriptions, which grew 19% to $56.4 million. Dynamics revenue grew 29% year-over-year driven by Dynamics 365, which grew 45% and 44% in constant currency. Continued demand for our modern, low-code app development solutions drove another strong quarter with 161% revenue growth in Power Apps.
LinkedIn revenue increased 37% and 36% in constant currency, with continued strength in Marketing Solutions, which grew 43% year-over-year and better-than-expected performance in Talent Solutions from the strong job market noted earlier. Segment gross margin dollars increased 20% and 19% in constant currency and gross margin percentage was relatively unchanged year-over-year. 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 13% and operating income increased 24%.
Next, the Intelligent Cloud segment. Revenue was $18.3 billion, increasing 26% year-over-year, which included a 1-point FX headwind relative to expectations. Excluding this headwind, revenue grew ahead of expectations driven by continued customer demand for our differentiated hybrid and cloud offerings. Overall, server products and cloud services revenue increased 29% year-over-year. Azure and other cloud services growth of 46% was driven by continued strength in our consumption-based services.
In our per-user business, the enterprise mobility and security installed base grew 28% to over 209 million seats. In our on-premises business, revenue increased 6%, in line with expectations driven by healthy demand for our hybrid offerings that include Windows Server and SQL Server running in multi-cloud environments. Enterprise Services revenue grew 8% and 7% in constant currency, driven by growth in Enterprise Support Services and Microsoft Consulting Services.
Segment gross margin dollars increased 21% and 22% in constant currency and gross margin percentage decreased roughly 2 points year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage increased slightly with improvements in Azure partially offset by the sales mix shift to Azure. Operating expense increased 14% and operating income grew 26%.
Now to More Personal Computing. Revenue was $17.5 billion, increasing 15% year-over-year, with better-than-expected performance in Windows OEM, Surface and Search and News Advertising. Revenue growth included a 1-point FX headwind relative to expectations. Windows OEM revenue increased 25%, significantly ahead of expectations, driven by the strong PC market noted earlier, particularly in the commercial segment, which has higher revenue per license. As a reminder, these results include roughly 6 points of positive impact from the $210 million revenue deferral related to Windows 11, which shifted revenue from Q1 to Q2.
Windows commercial products and cloud services revenue grew 13% and 14% in constant currency, driven by demand for Microsoft 365. Surface revenue grew 8% year-over-year, ahead of expectations as we were able to ship more devices than anticipated into a strong demand environment. Search and news advertising revenue ex-TAC increased 32%, better than expected, benefiting from the strong advertising market noted earlier. And we saw share gains in our Edge browser on Windows 10 and 11 devices.
And in Gaming, revenue increased 8%, in line with expectations. Xbox hardware revenue grew 4% and 3% in constant currency driven by continued strong demand and better-than-expected console supply on a strong prior year comparable that included the launch of the Xbox Series X and S. Xbox content and service revenue increased 10%, lower than expected as strong growth in first-party titles and Game Pass subscriptions was partially offset by weaker third-party title performance.
Segment gross margin dollars increased 20% year-over-year. Gross margin percentage increased roughly 2 points, driven by sales mix shift to higher margin businesses and improvement in Search and news advertising. Operating expenses increased 17%, driven by investments in Gaming, primarily ZeniMax, search and news advertising and Windows marketing. Operating income grew 22% and 21% in constant currency.
Now back to total company results. Capital expenditures, including finance leases, were $6.8 billion, up 25% year-over-year, lower than expected, primarily due to quarterly spend volatility in the timing of our cloud infrastructure buildout. Cash paid for PP&E was $5.9 billion. Our capital investments, including both new data center regions and expansion in the existing regions continue to be based on significant customer demand and usage signals.
Cash flow from operations was $14.5 billion, increasing 16% year-over-year as strong cloud billings and collections were partially offset by higher supplier payments related to hardware inventory builds. Free cash flow was $8.6 billion, up 3% year-over-year, reflecting higher capital expenditures in support of our growing cloud business. This quarter, other income and expense was $268 million, higher than anticipated, primarily driven by net gains on investments.
Our effective tax rate was approximately 17%. 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, my remarks for the next quarter do not include the impact from the Nuance acquisition, although we do expect it to close during Q3. Second, the outlook we give, unless specifically noted otherwise, is on a US dollar basis.
With that, let's move to the third quarter outlook. First, FX. With the stronger US dollar and based on current rates, we now expect FX to decrease total revenue growth by approximately 2 points and to decrease total COGS and operating expense growth by approximately 1 point. Within the segments, we anticipate roughly 2 points of negative FX impact on revenue growth in Productivity and Business Processes and Intelligent Cloud and 1 point in More Personal Computing.
Next, we expect our differentiated market position, customer demand for our high-value hybrid and cloud offerings and consistent execution to drive another strong quarter of revenue growth. In commercial bookings, growth should be healthy but we will be impacted by the strong prior year comparable as well as low growth in the expiry base. As a reminder, the growing mix of larger long-term Azure contracts, which are more unpredictable in their timing, drive increased quarterly volatility in our bookings growth rate.
Microsoft Cloud gross margin percentage should be roughly flat year-over-year. Excluding the impact of the change in accounting estimate, Q3 gross margin percentage will increase roughly 2 points, driven by continued improvement across all cloud services, despite revenue mix shift to Azure. And on a dollar basis, we expect capital expenditures to be slightly down sequentially with normal quarterly variability in the timing of cloud infrastructure buildout.
Next to segment guidance. In Productivity and Business Processes, we expect revenue between $15.6 billion and $15.85 billion. In Office 365, healthy revenue growth will be driven by the same factors as Q2 with similar seat growth across customer segments and continued momentum in E5. In our on-premises business, we expect revenue to decline in the high-teens, with continued customer shift to the cloud.
In Office consumer, we expect revenue to grow in the high single-digits with continued momentum in Microsoft 365 consumer subscriptions. For LinkedIn, the strong job market and healthy engagement on the platform should drive revenue growth in the low-30% range. And in Dynamics, we expect revenue growth in the mid-20% range, driven by strength in Dynamics 365, including continued momentum in Power Apps. For Intelligent Cloud, we expect revenue between $18.75 billion and $19 billion. 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 up sequentially in constant currency, driven by our Azure consumption business, with strong growth on a significant base. And our per-user business should continue to benefit from Microsoft 365 suite momentum, though we expect some moderation in growth rates given the size of the installed base. In our on-premises server business continued demand for our differentiated hybrid offerings should drive revenue growth in the low to mid-single digits.
And in Enterprise Services, we expect revenue growth to be in the low to mid-single digits. In More Personal Computing, we expect revenue between $14.15 billion and $14.45 billion. Continued strength in PC shipments, particularly in the commercial segment, should benefit Windows OEM despite ongoing supply chain constraints. We expect Windows OEM revenue growth in the high single-digits.
In Windows commercial products and cloud services, customer demand for Microsoft 365 and our advanced security solutions should drive growth in the low double-digits. In Surface, revenue should grow in the mid-teens with strength from our premium devices. In Search and News Advertising ex-TAC, we expect revenue growth in the mid to high-teens against a strong prior year comparable that was driven by a recovery in the advertising market.
And in Gaming, on a prior year comparable that included significant strength in hardware from our new consoles as well as across the Xbox content and services, we expect revenue growth in the mid-single digits. Console sales will continue to be impacted by supply chain uncertainty. And in Xbox content and services, we expect revenue growth in the mid to high-single digits with strong engagement and continued momentum across the platform.
Now back to company guidance. We expect COGS of $15.5 billion to $15.7 billion and operating expense of $13.4 billion to $13.5 billion, driven by headcount investments in high-growth, strategic areas to drive continued long-term revenue growth. In other income and expense, interest income and expense should offset each other. As a reminder, we are required to recognize mark-to-market gains or losses on our equity portfolio. And we expect our Q3 effective tax rate to be approximately 18%, slightly higher than our full year expected tax rate of approximately 17%.
And finally, for FY '22, given our strong performance in the first half of the fiscal year and our current H2 outlook, full year operating margins should be slightly up year-over-year even with the impact of changes in accounting estimates noted earlier and the significant strategic investments we are making to capture the tremendous opportunities ahead of us.
In closing, digital technologies are increasingly essential to empowering every person and organization on the planet to achieve more and we are well positioned with innovative, high value products. Our diverse yet connected portfolio of solutions span end markets, customer sizes and business models, uniquely enabling us to deliver long-term revenue and profit growth.
With that, Brett, let's go to Q&A.