Performance

Revenue increased $3.5 billion or 7% driven by growth in Intelligent Cloud and Productivity and Business Processes, offset in part by a decline in More Personal Computing. Intelligent Cloud revenue increased driven by Azure and other cloud services. Productivity and Business Processes revenue increased driven by Office 365 Commercial. More Personal Computing revenue decreased driven by Windows and Devices.

Cost of revenue increased $513 million or 3% driven by growth in Microsoft Cloud, offset in part by a reduction in depreciation expense due to the change in accounting estimate for the useful lives of our server and network equipment.

Gross margin increased $3.0 billion or 9% driven by growth in Intelligent Cloud and Productivity and Business Processes and the change in accounting estimate, offset in part by a decline in More Personal Computing.

• Gross margin percentage increased. Excluding the impact of the change in accounting estimate, gross margin percentage decreased slightly driven by reductions in Intelligent Cloud, offset in part by sales mix shift.

• Microsoft Cloud gross margin percentage increased 2 points to 72%. Excluding the impact of the change in accounting estimate, Microsoft Cloud gross margin percentage decreased slightly driven by reductions in Azure and other cloud services.

Operating expenses increased $996 million or 7% driven by 2 points of growth from the Nuance and Xandr acquisitions and investments in cloud engineering and LinkedIn.

Key changes in operating expenses were:

• Research and development expenses increased $678 million or 11% driven by investments in cloud engineering and LinkedIn.

• Sales and marketing expenses increased $155 million or 3% driven by 3 points of growth from the Nuance and Xandr acquisitions and investments in commercial sales, offset in part by declines in Windows and Devices advertising.

• General and administrative expenses increased $163 million or 11% driven by acquisition-related expenses and investments in corporate functions. General and administrative included a favorable foreign currency impact of 2%.

Operating income increased $2.0 billion or 10% driven by growth in Productivity and Business Processes and Intelligent Cloud and the change in accounting estimate, offset in part by a decline in More Personal Computing.

Revenue, gross margin, and operating income included an unfavorable foreign currency impact of 3%, 4%, and 5%, respectively. Cost of revenue and operating expenses both included a favorable foreign currency impact of 2%.