Revenue increased $281 million or 2%, primarily due to higher revenue from Gaming and Search advertising, offset in part by lower revenue from phones.
• Windows revenue increased 1%, driven by Windows OEM revenue growth, offset in part by a decline in Windows Commercial revenue. Windows OEM revenue increased 4%. Windows OEM Pro revenue grew 11%, outperforming the commercial PC market, primarily due to a higher mix of premium licenses sold and timing of license purchases. Windows OEM non-Pro revenue declined 5%, below the consumer PC market, primarily due to lower volumes of entry-level price devices sold. Windows Commercial revenue decreased 4%, primarily due to the impact of a prior year large deal.
• Gaming revenue increased $303 million or 8%, driven by higher revenue from Xbox hardware and Xbox software and services. Xbox hardware revenue increased 14%, primarily due to the launch of Xbox One X. Xbox software and services revenue increased 4%, primarily due to Xbox Live revenue growth, offset in part by a decrease in revenue from the prior year launch of video games.
• Search advertising revenue increased $215 million or 13%. Search advertising revenue, excluding traffic acquisition costs, increased 15%, driven by growth in Bing, primarily due to higher revenue per search and search volume.
• Surface revenue increased 1%, driven by a higher mix of premium devices sold, offset in part by a decrease in volume of devices sold.
• Phone revenue decreased $204 million.
Operating income decreased $51 million or 2%, primarily due to an increase in operating expenses.
• Gross margin was relatively unchanged, driven by a decline in Gaming, offset by an increase in Search advertising and Surface. Gross margin percentage decreased, primarily due to a gross margin percentage decline in Gaming.
• Operating expenses increased $49 million or 2%, driven by investments in engineering and the benefit of a legal settlement in the prior year, offset in part by a decrease in Windows marketing and phone expenses.