Revenue decreased $703 million or 7%, mainly due to lower revenue from Devices, offset in part by higher revenue from Windows, Search advertising, and Gaming.
• Surface revenue decreased $285 million or 26%, primarily due to a reduction in volumes sold.
• Windows revenue increased $177 million or 4%, mainly due to higher revenue from Windows OEM and Windows Commercial, offset in part by lower revenue from patent licensing. Windows OEM revenue increased 5%. Windows OEM Pro revenue grew 10%, outperforming the commercial PC market, primarily due to a higher mix of premium licenses sold. Windows OEM non-Pro revenue declined 1%, outperforming the consumer PC market due to a higher mix of premium devices sold. Windows Commercial revenue grew 6%, driven by multi-year agreement revenue. Patent licensing revenue decreased 19%, mainly due to a decline in license revenue per unit.
• Search advertising revenue increased $81 million or 5%. Search advertising revenue, excluding traffic acquisition costs, increased 8%, primarily driven by growth in Bing, due to higher revenue per search and search volume.
• Gaming revenue increased $78 million or 4%, primarily due to higher revenue from Xbox software and services. Xbox software and services revenue increased 7%, driven by a higher volume of Xbox Live transactions.
• Phone revenue decreased $730 million.
Operating income increased $346 million or 20%, due to lower operating expenses and slightly higher gross margin. Operating income included an unfavorable foreign currency impact of 3%.
• Operating expenses decreased $324 million or 11%, primarily due to a reduction in phone expenses and Surface launch-related expenses in the prior year. Sales and marketing expenses decreased $188 million or 16%, research and development expenses decreased $86 million or 6%, and general and administrative expenses decreased $50 million or 13%.
• Gross margin increased slightly, driven by lower cost of revenue, offset in part by lower revenue. Gross margin included an unfavorable foreign currency impact of 2%. Cost of revenue decreased $725 million or 15%, driven by a reduction in phone sales and lower Surface cost of revenue, offset in part by an increase in Xbox software and services cost of revenue.