Amy Hood
Executive Vice President and Chief Financial Officer at Microsoft
Thank you, Satya, and good afternoon, everyone. This quarter, revenue was $49.4 billion, up 18% and 21% in constant currency. Earnings per share was $2.22. It increased 14% and 18% in constant currency when adjusted for the tax benefit from the third quarter of fiscal year 2021. Several items impacted our financial performance that were not included in the guidance provided on our January Earnings Call. First, Nuance. My comments today across Q3 results and Q4 outlook include the impact from the Nuance acquisition which closed on March 4.
Our results included $111 million in revenue and a negative $0.01 impact to earnings per share including purchase accounting, integration and transaction-related expenses. Within our results, unless specifically noted otherwise, Nuance was not a material driver of growth rates. We continue to expect the Nuance acquisition will be minimally dilutive in FY 2022 and accretive in FY 2023 to non-GAAP EPS. Second, FX. The U.S. dollar strengthened throughout the quarter and created an incremental one-point FX headwind to total company revenue compared to expectations.
As a result, revenue EMS were negatively impacted by $302 million and $0.03 per share respectively. Finally, the war in Ukraine. We suspended all new sales of our products and services in Russia. Revenue generated in Russia represents less than one-tenth of total company revenue and we expect that it will decline significantly. The impact to operating income this quarter was roughly $130 million split evenly between lower revenue and higher bad-debt expense resulting in a negative $0.01 impact to EPS. Our results for the quarter are better than we expected across revenue, operating income and EPS, as we again delivered another strong quarter of top and bottom-line growth.
In our commercial business, healthy demand for our differentiated hybrid and cloud offerings together with excellent execution by our sales teams and partners drove increased commitment to our platform as well as higher usage of our services that Satya mentioned earlier. Commercial bookings increased 28% and 35% in constant currency, significantly ahead of expectations driven by strong execution across our core annuity sales motions. We also saw better than expected growth in large long-term Azure contracts against a very strong prior-year comparable.
Nuance benefited bookings by roughly 5 points. Our on-premises transactional licensing revenue across both the office and server businesses was more negatively impacted than expected due to the transition from our Open Licensing program to our cloud solution provider program. Commercial remaining performance obligation increased 32% and 34% constant currency to $155 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 2 points year-over-year to 96%.
Commercial cloud revenue was $23.4 billion and grew 32% and 35% in constant currency again ahead of expectations. Microsoft Cloud gross margin percentage decreased slightly year-on-year to 70%, excluding the impact from the change in accounting estimate for useful lives, the Microsoft Cloud gross margin percentage increased roughly 3 points driven by improvement across the cloud services, partially offset by sales mix shift to Azure. In our Consumer business, as you heard from Satya, we saw market share gains across seas, gaming consoles and our Edge browser.
Now back to the company level. As noted earlier, the U.S. dollar strengthened throughout the quarter. FX decreased total company revenue by 3 points, 1 point unfavorable to expectations, decreased COGS by 1 point in line with expectations, and decreased operating expense growth by 2 points, 1 point favorable to expectations. Gross margin dollars increased 18% in constant currency, and gross margin percentage decreased slightly year-over-year to 68%. Excluding the impact of the change in accounting estimate, gross margin percentage increased approximately one point driven primarily by improvement on our cloud services noted earlier.
Operating expense increased 15% and 17% in constant currency, slightly lower than expected as investments that shifted to future quarters were partially offset by the inclusion of Nuance. At a total company level, headcount grew 20% year-over-year as we continue to invest in key areas such as cloud engineering, customer deployment, LinkedIn and sales and included approximately four points of growth from the addition of Nuance. Operating income increased 19% and 23% in currency, and operating margins increased slightly year-over-year to 41%.
Excluding the impact of the change in accounting estimate, operating margins expanded roughly two points year-over-year. Now to our segment results; revenue from Productivity and Business Processes was $15.8 billion and grew 17% and 19% in constant currency, in line with expectations. Better than expected results across Office 365, LinkedIn and Office consumer were offset by impacts from incremental FX, the Open Licensing transition, Russia as well as lower than expected results in Dynamics. Office commercial revenue grew 12% and 14% in constant currency. Office 365 commercial revenue increased 17% and 20% in constant currency driven by install base expansion across all workloads and customer segments as well as higher ARPU from continued momentum in E5 revenue.
Paid Office 365 commercial seats grew 16% year-over-year to nearly $345 million with continued growth in our small and medium business and frontline worker offerings, and nearly 45% of our Office 365 commercial seats were purchased through Microsoft 365. Office commercial licensing was lower than expected, about 28% and 25% in constant currency, driven by the factors discussed earlier and a lower mix of contracts with higher in-period revenue recognition. Office consumer revenue grew 11% and 12% in constant currency ahead of expectations driven by continued momentum in Microsoft 365 subscriptions which grew 16% to $58.4 billion.
Dynamics revenue grew 22% and 25% in constant currency driven by Dynamics 365 which grew 35% and 38% in constant currency, substantially faster than the market although a bit lower than expected as we focused on stronger execution on our recent investments. LinkedIn revenue 34% and 35% in constant currency with better than expected performance in talent solutions as well as continued strength in marketing solutions and record levels of engagement on the platform. Segment gross margin dollars increased 16% 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 two points driven by improvement across all cloud services. Operating expense increased 13% and 14% in constant currency, and operating income increased 19% and 23% in constant currency. Next, the Intelligent Cloud segment which includes approximately four weeks of results from Nuance. Revenue was $19.1 billion, increasing 26% and 29% in constant currency. Excluding the impact of Nuance and the approximately $150 million greater FX than expected, revenue results were ahead of expectations.
Overall, server products and cloud services revenue increased 29% and 32% in constant currency. Azure and other cloud services grew 46% and 49% in constant currency, ahead of expectations driven by continued strength in our consumption-based services. The inclusion of Nuance cloud services did not change the Azure constant currency growth rate. In our per user business, the Enterprise Mobility and Security install base grew 25% to over 218 million seats. In our on-premises server business, revenue increased 5% and 7% in constant currency, ahead of expectations driven by healthy demand for our hybrid offerings partially offset by the Open Licensing transition mentioned earlier.
The inclusion of Nuance on-premises offerings did not change the server constant currency growth rate. Enterprise services revenue grew 5% and 6% constant currency, driven by growth in enterprise support services. The inclusion of Nuance professional services impacted the constant currency growth rate by one point. Segment gross margin dollars increased 24% and 27% in constant currency, and gross margin percentage decreased roughly one point year-over-year. Excluding the impact of the change in accounting estimate, gross margin percentage increased roughly one point with improvements in Azure, partially offset by the sales mixed shift to Azure.
Operating expense increased 17% and 19% in constant currency, and operating income grew 29% and 33% in constant currency. Now to more Personal Computing; revenue was $14.5 billion, increasing 11% and 13% in constant currency, above expectations, driven by the better-than-expected performance in searching Windows, offset by Surface. FX decreased segment revenue approximately $100 million greater than expected. Windows OEM revenue increased 11% with continued strength in the commercial PC which has higher revenue per license.
Windows commercial products and cloud services revenue grew 14% and 19% in constant currency, ahead of expectations, driven by demand for Microsoft 365 with some benefit from a greater mix of contracts with higher end-period revenue recognition. Surface revenue grew 13% and 18% constant currency, lower than expected, driven by consumer channel partially offset by strength in Commercial. Search and news advertising revenue, ex TAC, increased 23% and 25% in constant currency, better than expected benefiting from an increase in search volumes, even as we saw headwinds during March from the impact of the war in Ukraine.
And in gaming, on a high prior-year comparable revenue increased 6% and 8% in constant currency. Xbox hardware revenue was better than expected as increased supply of consoles in quarter drove growth of 14% and 16% in constant currency. Xbox content and services revenue grew 4% and 6% in constant currency, below expectations, driven by lower engagement across the platform, even as it remains above pre-pandemic levels. Segment gross margin dollars increased 10% and 13% in constant currency, and gross margin percentage decreased slightly. Operating expenses increased 17% and 18% in constant currency, and operating income grew 7% and 10% constant currency.
Now back to total company results. Capital expenditures, including financed leases, were $6.3 billion, in line with expectations. Cash paid for PP and E was $5.3 billion. Cash flow from operations was $25.4 billion, increasing 14% as strong cloud billings and collections were partially offset by higher supplier payments related to hardware inventory builds as we manage continued uncertainty in the supply chain. Free cash flow was $20 billion, up 17%. This quarter other income and expense was negative $174 million, lower than anticipated, driven by net losses on investments including market-to-market losses on our equity portfolio and net losses on foreign currency remeasurement.
Equity market declines drove net investment losses this quarter compared to net investment gains last year, negative two-point impact on year-over-year EPS growth. Our effective tax rate was approximately 17%. And finally, we returned $12.4 billion to shareholders through share repurchases and dividends. Now, before we turn to our outlook a few reminders. First, FX. With the stronger U.S. dollar and based on current rates, we now expect FX to decrease total company revenue growth by approximately two points and to decrease total COG as an operating expense growth by approximately one point.
Within the segments, we anticipate roughly three points of negative FX impact on revenue growth and productivity and business processes, and two points in intelligent cloud and more personal computing. Second, my remarks for the next quarter include a full quarter of impact from the Nuance acquisition. Third, we anticipate the war in Ukraine to continue to impact our business in Q4 with a roughly $110 million impact on revenue and minimal impact on operating expenses. Next, we have taken into account the current impact of shutdowns in China in our outlook; however, extended production shutdowns that reach into May would further negatively impact our outlook across Windows OEM, Surface and Xbox hardware.
Finally, the outlook we give, unless specifically noted otherwise, is on a USD basis. With that context in place, let's turn to our Q4 outlook. In our largest quarter of the year, we expect our differentiated market position, customer demand across the solution portfolio, and consistent execution to drive another strong quarter of revenue growth. In commercial bookings, a growing Q4 expiry base, strong execution across our core annuity sales motions, and increased commitment to our platform should drive healthy growth against a strong prior-year comparable.
As a reminder, the growing mix of larger long-term Azure contracts, which are more unpredictable in their timing, always drives increased quarter volatility in our bookings growth rate. Microsoft Cloud growth margin percentage should be down roughly one point year-over-year. Excluding the impact of the change in accounting estimate, Q4 margin percentage will increase roughly one point, driven by continued improvement across our cloud services, partially offset by a revenue mix shift to Azure. Capital expenditures, we expect a sequential increase on a dollar basis as we continue to invest to meet growing global demand for our cloud services.
Next in segment guidance; in Productivity and Business Processes, we expect revenue between $16.65 billion and $16.9 billion. In Office Commercial, revenue growth will again be driven by Office 365 with healthy seat growth across customer segments and ARPU growth through E5. We expect Office 365 revenue growth to be sequentially lower by a point or two on a constant currency basis. In our On-premises Business, we expect revenue to decline similar to last quarter. In Office Consumer, we expect revenue to grow in the high single digits, driven by Microsoft 365 subscriptions.
For LinkedIn, we expect revenue growth in the high 20s, driven by the strong job market and healthy engagement on the platform. And in Dynamics, we expect revenue growth similar to last quarter. For Intelligent Cloud, we expect revenue between $21.1 billion and $21.35 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. We expect Azure revenue growth to be sequentially lower by roughly two points on a constant currency basis with a bit more FX impact on U.S. dollar growth than at the segment level.
Azure revenue will continue to be driven by strong growth in our consumption business. And our per-user business should continue to benefit from Microsoft 365 suite momentum, though we expect moderation in growth rates, given the size of the installed base. In our On-premises Server business we expect revenue to decline in the low to mid-single digits as demand for our hybrid offerings will be more than offset by the strong prior-year comparable, which included four points of benefit from contracts with higher in-period revenue recognition as well as continued transactional weakness from the licensing program transition noted earlier.
And at Enterprise Services, we expect revenue growth to be in the high single digits. In More Personal Computing, we expect revenue between $14.65 billion and $14.95 billion. As mentioned earlier, our guidance reflects the current constraints from the shutdowns in China, which have negatively impacted Q4 supply for OEM, Surface and Xbox consoles. In Windows OEM, we expect revenue growth in the low to mid-single digits, driven by the continued shift to a commercial-led PC market where revenue per license is higher. In Windows Commercial Products and Cloud Services, customer demand for Microsoft 365 and our Advanced Security Solutions should deprive growth in the low double digits.
In Surface, revenue should grow in the low double digits, in Search and News Advertising ex TAC we expect revenue growth of approximately 20%. And in gaming, we expect revenue to decline in the mid to high single digits, driven by lower engagement hours year-over-year as well as constrained console supply. We expect Xbox Content and Services revenue to decline mid-single digits though engagement hours are expected to remain higher than pre-pandemic levels. Now back to company guidance. We expect COGs of $16.6 billion to $16.8 billion and operating expense of $14.8 billion to $14.9 billion, resulting in another quarter of operating margin expansion excluding the change in useful life.
We expect other income and expense to be negative $50 million, reflecting FX remeasurement impact based on market conditions in April. Similar to the rest of our guidance, further equity and FX movements through Q4 are not reflected in this number. As a reminder, we are required to recognize mark-to-market gains or losses on our equity portfolio which can increase quarterly volatility, and we expect our Q4 effective tax rate to be approximately 18%.
We expect to close FY 2022 even in a more complex macro environment with the same consistency we have delivered throughout the year with strong revenue growth, share gains and improved operating margins as we invest in the areas that are key to sustaining that growth. As we look towards FY 2023, our track record of delivering high value to our customers across many diverse and durable growth markets gives us confidence that we will drive continued healthy double digit revenue and operating income growth.
Now, Brett, let's go to Q&A.