Server products and services revenue grew 9% again outpacing the broader IT market. Growth in premium mix helped to drive double-digit revenue growth in SQL Server and system center. Windows server annuity revenue grew double-digit again this quarter, the transactional revenue was down primarily due a declining traditional server market. Additionally we are pleased with the performance in our dynamics business which grew revenues 13% driven by growth in both on premise and cloud offerings. Operating expense grew 1% to $8.3 billion and was favorable to our expectations. These results are inclusive of investments that we made in our strategic growth areas, a few of which were showcased last week at Windows 10 event. Excluding approximately $750 million from the addition of NDS, operating expense would have declined 8%. Relative to the guidance that we provided for the quarter roughly half of the favorability resulted from FX changes with the balance driven by our continued prioritization [inaudible] . Our integration and restructuring efforts have been focused on optimizing resources across the company which includes reducing the expense base in our phone business.
To date we have integrated the manufacturing and supply-chain teams across Microsoft while also rationalizing our phone manufacturing capacity. In operating expense we committed to reducing $1 billion from the phone cost base which we have done to continue to look for opportunities to try further efficiencies. Our effective tax rate was 25% and higher-than-expected due to previously mentioned income tax charge per IRS audit adjustment, beyond that the increase was driven by the inclusion of phone result in our changing geographic mix. Capital expenditures were $1.5 billion driven primarily by investments to increase our capacity as we expanded existing and added new data centers as well as main server purchases in support of our fast growing cloud business. This quarter we increased our capital return by 5% to $4.5 billion return to shareholders through buybacks and dividends, and in fact to reinforce these comments we will continue to take thoughtful steps to increase capital returns to shareholders with a focus on value.
With that overview of the current quarter let me now turn to our outlook. Our guidance is based on our current view of the FX rates. Should the US dollar strengthened beyond those assumptions as it did this quarter we would see additional negative impact to earnings, revenue, our balance sheet and our contracted but not billed balanced.
As a reminder in our annuity businesses the FX impact is first reflected on our revenue which is recorded at a rate when the contract is build, then revenue comes on to the P&L at that same rate as it is recognized generally over the next year, therefore in Q3 we will start to recognize a higher percentage of revenue from periods with a stronger US Dollar than the prior year comparison in total we expect that FX from negatively impact revenue growth by approximately 4 points in Q3. The majority of this impact is in our commercial business. In FY 14 it was our Q2 to Q4 results that most benefited from Windows XP and it’s support. As such our growth rates across Windows Pro and transactional office will be impacted if our business moves back to pre-XP levels. On a geographic basis we expect a year on year revenue declines in China, Russia and Japan.
In Japan Q3 represents an even tougher comparison with the anniversary of the VHA which again will create different comparable, difficult comparable in Windows and Office. We currently expect the geographic dynamics challenging comparable from XP and FX had once would be in placed throughout the remainder of our fiscal year. With that overall background let me move to our specific Q3 guidance. Starting with devices and consumer, revenue guidance includes approximately 4 point drag from FX, in licensing we expect revenue to be $3.4-$3.6 billion this range seems to more challenging comparable I mentioned earlier. The range also includes the reduction channel inventory for Windows non Pro opening price point PCs.
