Executive Vice President & Chief Financial Officer at Hewlett Packard Enterprise
Thank you very much, Antonio. I'll start with a summary of our financial results for the third quarter of fiscal year 2022. As usual, I'll be referencing the slides from our earnings presentation to guide you through our performance. Antonio discussed the key highlights on slide 1, so now let me discuss our Q3 performance details starting with slide 2. We continue to see healthy demand across our differentiated edge-to-cloud portfolio. As expected, year-over-year order growth rates moderated to down 9% this quarter as we begin to lap challenging compares. As a reminder, orders were up 29% year-over-year in Q3 of fiscal year 2021.
We continued to grow our backlog sequentially this quarter to a new record level that is up 96% year-over-year. Our backlog is also expected to be roughly flat next quarter and remains firm with no meaningful cancellations. This maintains our confidence in achieving both our fiscal year 2022 revenue outlook of 3% to 4% growth adjusted for currency and our longer-term 2% to 4% revenue CAGR outlook provided at our 2021 Securities Analyst Meeting.
In Q3, we delivered revenue of $7 billion, up 4% year-over-year and above our outlook of up low-single digits sequentially despite an ongoing challenging supply environment and greater currency headwinds. Based on current rates, we now expect currency to be a 2.5 point headwind to revenue for the full year as opposed to the 50 basis points expected at the start of our fiscal year.
We continue to be very pleased with the resiliency and expansion of our non-GAAP gross margins despite the inflationary environment and ongoing supply chain disruptions that are driving up material and logistics costs. We delivered non-GAAP gross margin of 34.7%, up 50 basis points sequentially and flat year-over-year driven primarily by strong pricing discipline and our continued mix shift towards higher-margin software-rich offerings.
Non-GAAP operating margins were 10.5%, up 120 basis points sequentially and 70 basis points year-over-year, reflecting operating leverage from strong gross margin and opex savings from our cost optimization actions taken during the pandemic. We expect to gain further operating leverage in the short term, as we drive more revenue growth and benefit from investments in the high-growth, margin-rich areas of our portfolio. With our better-than-guided revenue growth, we delivered non-GAAP diluted net earnings per share of $0.48, up 9% sequentially despite elevated input costs from the ongoing industry-wide supply constraints and foreign exchange impact.
As previously indicated, cash flow from operations is following our normal seasonality this year and working capital has also turned into a tailwind in the second half. In Q3, we generated $1.3 billion of cash flow from operations and free cash flow of $587 million. We continue to make further investments in strategic inventory to navigate the current supply environment, and we are now at peak inventory levels. We will begin to work our inventory balance down next quarter and into the following year, and I'll touch more on that shortly in our outlook.
Finally, we continue to return substantial capital to our shareholders. We paid $156 million of dividends in the current quarter and are declaring a Q4 dividend today of $0.12 per share payable in October. We also repurchased $197 million in shares, on track towards our goal of at least $500 million of share buybacks executed this fiscal year and bringing our year-to-date total capital returns to $851 million, reflecting our confidence in future cash flow generation.
Slide 3 highlights key metrics demonstrating our progress in our as-a-service business, with more recurring revenue at higher margins. Total as-a-service orders remained robust, up 39% year-over-year as we begin to lap more challenging compares. Our year-to-date as-a-service orders are up 86%, which is the best indicator of the long-term health of this business and supports our confidence in achieving our three-year ARR CAGR target of 35% to 45% from fiscal year 2021 to fiscal year 2024. Our ARR growth rate improved from last quarter and was up 28% year-over-year to $858 million, but still faces supply constraints continuing to limit some installations. We also continue to expand our as-a-service margins as our mix of both software and services continues to increase to 64% in Q3, up 6 points year-over-year, with our expanding cloud and SaaS offerings, particularly in edge and storage.
Let's now turn to our segment highlights on slide 4. Our growth businesses continue to show improving top line momentum and record levels of backlog fueled by strong demand. In the Intelligent Edge, we achieved both a record level of orders and revenue in the quarter. We grew orders double digits for the seventh consecutive quarter and have roughly 20 times our normal levels of backlog. Revenue growth accelerated to 12% year-over-year, outperforming the competition, and demonstrating particular strength in Silver Peak, and our Edge-as-a-Service offerings, both up strong double digits. We delivered operating margins of 16.5%, up 390 basis points sequentially and 40 basis points year-over-year, reflecting the improving operating leverage in this business and this despite higher component and logistics costs.
In HPC and AI, revenue grew 15% year-over-year and backlog of awarded contracts remained robust at just under $3 billion. Our Q3 operating profit margin was 3.4%, up 9 points sequentially and is expected to increase further next quarter, with the recognition of large deals.
In Compute, demand remained robust with backlog growing sequentially to another record and is now at five times normal levels. Revenue was down 1%, reflecting a continued difficult supply environment with some improvement expected next quarter with new multi-sourcing options for certain components and demand steering towards new solutions. We also continue to be very focused on executing our dynamic pricing strategy that has been effective in managing the increased supply and logistic costs and gives us a very high-quality backlog. The results are showing up in our operating margin performance at 13.3%, up 210 basis points year-over-year and still well above our long-term target set at SAM 2021 of 11% to 13%.
Within Storage, we achieved another record level of backlog and revenue was up 1%. We continue to emphasize our own IP, margin-rich products that were up double digits, including nimble and yperconverged. Our as-a-service offerings within Storage-like Block [Phonetic] are also leading order and ARR growth among our business segments. With the favorable mix shift, our operating margins improved to 14.7%, up 210 basis points sequentially. With respect to Pointnext operational services combined with Storage services, orders grew again and are up year-to-date mid-single digits in constant currency, similar to levels for total fiscal year '21, despite the exit of our Russia business. As you know this is a key component of recurring revenue and profits for each of our segment.
Within HPE Financial Services, volume increased 4% year-over-year in constant currency with strong performance in GreenLake and revenue rose 1%. It's worth noting that our leasing business is well insulating from rising interest rates over time, as we price based on a spread and customers often choose to extend their leases during uncertain macroeconomic conditions. Our profitability also continues to benefit from higher residual value realization and bad debt write-offs have returned to pre-COVID levels. Our operating margin was 11.8%, up 70 basis points from the prior year, and our return on equity at 19.5% remains well above the 18% plus target set at SAM 2021.
Slide 5 highlights our revenue and EPS performance where you can see our revenue and EPS continue to grow despite the difficult supply environment, the exit from our Russia business, and increasing headwinds from currency. Year-to-date through Q3, we have already experienced a headwind of $0.05 from currency and $0.03 from exiting Russia. In spite of these headwinds, we delivered a better mix of higher-margin earnings across our portfolio as we continue to execute our edge-to-cloud strategy.
This improvement can be seen on slide 6 where we delivered non-GAAP gross margins in Q3 of 34.7%, up 50 basis points sequentially and flat year-over-year, showing their resilience in spite of the increased component and logistics costs. This was driven by both our strategic pricing actions and the favorable mix shift we have been driving to edge own IP Storage and our as-a-service business.
Moving to slide 7. You can see our non-GAAP operating margins this quarter of 10.5%, up 1.2 points sequentially and up 70 basis points year-over-year. This reflects revenue growth combined with both gross margin expansion and opex savings to give us strong operating leverage across the business. This has also been achieved while continuing to invest more in both R&D and our go-to-market in strategic areas of the business for future growth.
On slide 8, let's spend some time reminding everyone about the status of our unique setup in China through H3C. As disclosed in late April, we have extended our existing put option that is struck at 15 times trailing 12-month earnings through to October 31, 2022. We did this to enable the new investors at the Unigroup level to complete their restructuring and are now determining the longer-term path forward for our stake. We value our presence in China, the second largest and fastest-growing IT market, although prior to the execution of any extension, we will balance the strategic and financial benefits of a continuous involvement in China with rising risks, including geopolitical risk. H3C makes up a significant portion of our P&L and cash flow, and you can see that we are generating growing value to shareholders with our unique setup. Our equity interest rose 21% in fiscal year '21 and has grown another 9% in this Q3. Needless to say, we will keep you up to date as we arrive at a longer-term solution for this valuable asset.
Turning to slide 9. Our cash flow from operations was $1.3 billion in Q3. This is aligned to our normal pre-pandemic seasonality and our expectations of working capital tailwinds in the second half. We have been strategically building inventory throughout this year to navigate the supply chain environment. While we still expect to start working down inventory levels in Q4, it will take longer than expected and into fiscal year '23, but still puts us in a better position to convert the continued order demand into revenue and cash in future quarters.
Now turning to our outlook on slide 10. As discussed, Antonio and I are very pleased with the continued demand strength and growing backlog that gives us confidence in achieving our original SAM revenue guidance in fiscal year 2022 for growth of 3% to 4% adjusted for currency that now includes a 2.5-point headwind from foreign exchange rates on a full year basis. More specifically for Q4 '22, we expect revenue to be up at least 5% sequentially as reported, which includes the larger currency headwind. This is still above our normal seasonality to reflect some improvements in supply due to the full resumption of factories' activity in China and our actions to multisource, more components and steer the demand.
From an EPS perspective, we are tightening our fiscal year '22 non-GAAP outlook range as we move towards the end of the year to $1.96 to $2.04. This reflects the impact from the supply environment, which we expect to sustain into Q4 and further appreciation of the U.S. dollar since last quarter. As a result, this implies that for Q4 '22, we expect GAAP diluted net EPS of $0.32 to $0.40 and non-GAAP diluted net EPS of $0.52 to $0.60. Furthermore, our free cash flow is also being impacted by exiting our Russia business as well as headwinds from unfavorable currency movements that were previously absorbed in our prior outlook. As a result, we now expect to deliver fiscal year '22 free cash flow of $1.7 billion to $1.9 billion.
So overall, I am very pleased with our results in the quarter that can be characterized by sustained demand and very solid execution navigated a continued challenging supply environment. With record levels of high-quality backlog, we are very well positioned to capitalize on the ongoing edge-to-cloud opportunity and close out a strong fiscal year 2022. We look forward to seeing you at our next Securities Analyst Meeting in October to provide our outlook for the fiscal year and beyond.
Now with that, let's open it up for questions.