Revenue decreased $2.8 billion or 12%, primarily due to lower revenue from More Personal Computing and the impact of a net $1.3 billion revenue deferral related to Windows 10, offset in part by revenue growth in Intelligent Cloud. Revenue included an unfavorable foreign currency impact of approximately 5%. More Personal Computing revenue decreased, primarily due to lower revenue from phones, reflecting a change in strategy for the phone business. Intelligent Cloud revenue increased, primarily due to higher revenue from server products and services, including Microsoft Azure.
Operating income decreased slightly, primarily due to lower gross margin, offset in part by a reduction in impairment, integration, and restructuring expenses, as well as lower sales and marketing expenses. Gross margin decreased $1.8 billion or 12%, driven by Windows 10 net revenue deferrals, as well as lower gross margin from More Personal Computing and Productivity and Business Processes, offset in part by higher gross margin from Intelligent Cloud. Gross margin included an unfavorable foreign currency impact of approximately 6%.
Key changes in expenses were:
• Cost of revenue decreased $1.1 billion or 13%, mainly due to lower phones sales.
• Impairment, integration, and restructuring expenses were $1.1 billion in the prior year, comprised mainly of restructuring charges associated with our Phone Hardware Integration Plan.
• Sales and marketing expenses decreased $395 million or 11%, mainly due to a decline in phones advertising and marketing program costs and a reduction in headcount-related expenses. Sales and marketing expenses included a favorable foreign currency impact of approximately 6%.
Current year diluted earnings per share (“EPS”) was negatively impacted by Windows 10 revenue deferrals, which decreased EPS by $0.10. Prior year diluted EPS was negatively impacted by impairment, integration, and restructuring expenses, which decreased diluted EPS by $0.11.