Revenue was relatively unchanged, with lower revenue from phones offset by higher revenue from Search advertising and Surface.
• Windows revenue was relatively unchanged, with growth in Windows OEM and Windows Commercial revenue offset by a decline in patent licensing revenue. Windows OEM revenue increased 4%. Windows OEM Pro revenue grew 7%, outperforming the commercial PC market, primarily due to a higher mix of premium licenses sold. Windows OEM non-Pro revenue declined 1%, in line with the consumer PC market. Windows Commercial revenue increased 7%, driven by multi-year agreement revenue growth.
• Search advertising revenue increased $210 million or 15%. Search advertising revenue, excluding traffic acquisition costs, increased 15%, primarily driven by growth in Bing, due to higher revenue per search and search volume.
• Surface revenue increased $113 million or 12%, driven by sales of the new Surface Laptop.
• Gaming revenue increased 1%, primarily due to higher revenue from Xbox software and services, offset in part by lower Xbox hardware revenue. Xbox software and services revenue increased 21%, driven by a higher volume of Xbox Live transactions, offset in part by a decline in revenue per transaction. Xbox hardware revenue decreased 48%, mainly due to a decline in volume of consoles sold and lower prices of consoles sold.
• Phone revenue decreased $315 million.
Operating income increased $532 million or 26%, primarily due to higher gross margin.
• Gross margin increased $494 million or 10%, driven by growth in Gaming, Search advertising, Surface, and Windows. Gross margin percentage increased due to gross margin percentage improvements across Gaming, Surface, Windows, and Search advertising and favorable sales mix.
• Operating expenses decreased slightly, driven by Windows and Gaming marketing expenses in the prior year and a reduction in phone expenses.