Tarek Robbiati
Executive Vice President & Chief Financial Officer at Hewlett Packard Enterprise
Thank you very much, Antonio. Q4 was no question, an outstanding quarter for HPE. As usual, I will reference slides from our earnings presentation to guide you through our performance.
Antonio discussed key highlights for Q4 '22 and fiscal year '22 on Slide 4 and 5. Let me discuss our Q4 performance details, starting with Slide 6. Sustained demand continues to be a core attribute of our differentiated edge-to-cloud portfolio, which has translated to record or near-record results. As expected, year-over-year order growth continued to moderate in Q4 '22 to down 16% year-over-year as we lap challenging compares. Having said that, our sequential order growth was flat relative to Q3 '22, which illustrates that demand for our products and services is steady. The key takeaway here is that we are entering fiscal year '23 with an order book that is even higher than the order book we entered fiscal year '22 with, which attests to our momentum for fiscal year 2023.
Now that we have closed fiscal year '22, we will again turn our attention to focus on revenues rather than orders as we have been flagging. This is because of timing differences. Orders and backlog are not traditionally good indicators of quarterly revenue in normal times. We will continue to disclose orders for our as-a-service and HPE Pointnext OS business.
While the supply environment is improving, it is not quite back to pre-pandemic levels. Our large order book contributes to our confidence in our fiscal year '23 revenue outlook of 2% to 4% growth adjusted for currency, and the longer term 2% to 4% revenue CAGR outlook over the fiscal year '22 to '25 period we provided at our 2022 Securities Analyst Meeting in Houston last October.
We delivered Q4 revenue of $7.9 billion, which is up 12% annually and 15% sequentially adjusted for currency. This is the second highest revenue figure since our separation transactions in 2017. It would easily have been the highest had revenue recognition from the Frontier deal not slipped into fiscal year '23. The Q4 sequential revenue growth is well above our prior outlook for at least 5% sequential growth. We have had healthy demand throughout the past two years. We now also have improving supply as supply capacity in the consumer electronics market is redirected towards enterprise markets where demand for digital transformation continues unabated.
We closed fiscal year '22 with full-year revenue growth of 3% as reported. Currency and our exit from Russia and Belarus represented a 300 basis points headwind to revenue for the full year, which means we ended the year solidly above our initial guidance for 3% to 4% revenue growth adjusted for currency. Our non-GAAP gross margins remain resilient, thanks to the pricing actions we have taken.
Our 33.1% non-GAAP gross margin in Q4 is up 10 basis points year-over-year, reflecting a very strong Compute quarter and higher logistics costs in the edge business. We retain our pricing discipline and continue to shift our mix of business towards higher-margin, software-intensive as-a-service offerings. Non-GAAP operating margins reached a record 11.5%, which represented a 100 basis points increase sequentially and a 180 basis points increase year-over-year.
This result would not have been possible without the strategic actions we have taken back in fiscal year '20 to reallocate resources and optimize our cost structure. These actions have put us in the position to benefit from an enhanced operating leverage for several quarters over the past three years, and this will continue in fiscal year '23 and beyond as Antonio and I remain determined to maintain our focus on productivity.
Our cost optimization and resource allocation program announced during the pandemic of 2020 and which is now substantially finished, has achieved annual savings of $875 million, well above our initial target of $800 million. As a result, we are now rightsized and we are entering a very different phase of the company, one where the combination of our enhanced cost structure and substantial order book is expected to deliver profitable growth that is increasingly recurring at higher margins as our as-a-service transformation continues to unfold.
Thanks to revenue growth above our guidance, we delivered Q4 non-GAAP diluted net earnings per share of $0.57, which exceeded the midpoint of our guidance range. This is the highest quarterly non-GAAP net diluted EPS figure since our 2017 separations. Our full-year non-GAAP net diluted EPS of $2.02 was at the upper end of our guidance range of $1.96 to $2.04 post Russia and FX and near the midpoint of our SAM 2021 guidance. Again, we estimate FX impacts on our Russia exit combined for a $0.17 EPS headwind in fiscal year '22.
Our GAAP P&L reflects a non-cash write-down of goodwill in our HPC & AI and Software businesses. Macro trends, including contracting market multiples and higher discount rates used in our impairment test for HPC & AI and Software, respectively, significantly impacted this outcome. We continue, nonetheless, to be bullish on the HPC & AI segment given our clear number one position in the market. And our outlook for this segment is consistent with what we said at SAM 2022. And software remains a critical component of our HPE GreenLake strategy.
I am particularly pleased with our free cash flow performance in Q4 '22, where we generated $3 billion in cash flow from operations and free cash flow of $2 billion as we work through our substantial orders and reduce our inventory. As Antonio mentioned, this brought our full-year free cash flow to $1.8 billion. This is triple our free cash flow in 2020. For the year, free cash flow met the midpoint of our guidance. In fact, our full-year free cash flow met our initial pre-Russia and FX guidance from SAM 2021.
Finally, we are continuing to return substantial capital to our shareholders. We returned over $1.1 billion in capital to shareholders this year, which represents over 60% of our free cash flow. We paid $154 million in dividends this quarter and repurchased $128 million in stock. That brought our buyback plan to $512 million for the year, above our $500 million target.
Our as-a-service business momentum remains strong and this business is lifting our mix of higher margin recurring revenue. Total as-a-service orders remain robust. Orders grew 33% in Q4 despite lapping 104% growth in Q4 '21. On a constant currency basis, orders grew 43% in Q4 and our full year as-a-service orders grew 68%. This indicates the long-term health of our as-a-service portfolio and further strengthens our confidence in our three-year ARR target of a 35% to 45% CAGR from fiscal year '22 to fiscal year '25.
Our ARR of $936 million represented 17% growth as reported and 25% growth in constant currency. For March of fiscal year '22, the industry supply constraints have limited shipments and weighed on our growth rate. We expect the improved supply environment to accelerate our ARR growth moving forward. We also continue to expand our as-a-services margin as our mix of software and services increased to 66% in Q4, up 4 points year-over-year, thanks to our cloud and SaaS offerings, particularly in edge and storage. As a result, the gross margins in our as-a-service business remain meaningfully above our corporate gross margins.
Let's now turn to our segment highlights on the next slide. All revenue growth rates on this slide are in constant currency. In the Intelligent Edge, we delivered a record quarterly revenue number. We grew our revenues 23% year-over-year. We are outgrowing our main competitors and are taking share across wireless LAN, enterprise switching and SD-WAN, including some of the largest enterprise customers.
Customers are increasingly adopting our edge services platform and automation software suite. Our operating margin of 13.3% was up 2.4% annually, though down 3.2% sequentially, with FX being the biggest contributor to the sequential decline. We continue to expect our edge business to grow and perform like a Rule of 40 business moving forward.
In HPC & AI, revenue fell 11% year-over-year, solely as a result of the Frontier deal slipping into fiscal year '23, which also impacted our operating margin in this segment. We are on track to close that deal in Q1 and have factored that into our guidance. We continue to have orders for HPC & AI solutions of about $3 billion to be delivered in upcoming quarters.
Compute revenues grew 22% year-over-year to a near record of $3.7 billion. The segment benefited from the multi-sourcing and demand steering initiatives we have discussed in prior calls, as well as steadily improving supply availability. We have clearly outperformed the competition in fiscal year '22 and our dynamic pricing strategy has helped us navigate a volatile supply climate while maintaining a healthy margin profile. Our Compute operating margin of 14.7% remains well above our long-term outlook for 11% to 13%, which attest of the best-in-class performance delivered by our Compute business.
In Storage, we are very pleased to report 6% revenue growth led by all-flash array and HCI. Alletra is one of our fastest ramping new products ever and grew revenue 100% sequentially. In total, revenue from our own IP margin-rich products rose strong double digits in Q4 and contributed to an annual operating margin of 15.9%, which represents a year-over-year gain of 210 basis points and a sequential gain of 120 basis points.
Our storage transformation is now in full swing, as you can see and we expect our Storage business to deliver revenue growth in line with market, with our own IP products growing above market. With respect to Pointnext operational services, combined with storage services, orders grew sequentially and for the year rose, mid-single digits in constant currency despite the exit of our Russia and Belarus business.
Finally, HPE Financial Services expanded its financial volume 3% year-over-year and revenue rose 6%. Our operating margins fell 3 percentage points year-over-year as we adjust our prices for a higher interest rate climate. It is worth reiterating that our leasing profit dollars are well insulated from a higher rate environment over time as we price on a spread and that our business is resilient in a downturn. Throughout the pandemic, our annual loss ratio never exceeded 1%. Our loss ratio is currently nearing pre-pandemic levels of approximately 0.5%. As a result, our fiscal year '22 HPEFS return on equity remained well above the 18% target we reiterated at SAM 2022.
Slide 9 highlights our revenue and non-GAAP net diluted EPS performance. Antonio and I are very pleased that our strategic focus on both the top and bottom lines is evident in these results. Our revenue and EPS continue to grow despite the volatile supply environment, the exit from our Russia and Belarus businesses and increasing headwinds from currency. As mentioned earlier, during fiscal year '22, we experienced a headwind of $0.12 from currency and $0.05 from exiting Russia and Belarus.
In spite of these headwinds, we met our SAM '21 non-GAAP guidance for fiscal year '22 and 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 10, where we delivered non-GAAP gross margins in Q4 of 33.1%. This is a 10 basis point year-over-year improvement despite a significant revenue mix shift to Compute this quarter. Our growing gross profit and margin are a testament to the success of our strategic pricing actions through the supply challenges and the favorable mix shift we are driving towards higher-margin products across our portfolio.
Moving to Slide 11. You can observe that we have delivered an 11.5% non-GAAP operating margin for the company. This is not only up 180 basis points year-over-year and 100 basis points sequentially, but it is the highest operating margin in the history of the company since our 2017 separations. Our very strong Q4 revenue performance and our resilient gross margins are certainly leading contributors to the operating margin expansion. And again, as I mentioned at SAM, this performance would not have been possible without the foundation provided by our resource allocation and cost optimization plan that we launched at the start of the 2020 pandemic.
On Slide 12, let's discuss our setup in China through H3C. As disclosed at SAM, we have extended our existing put option that is struck at 15 times trailing 12-month earnings through to December 31, 2022. We did this to allow our partners time to finalize their engagement with their stakeholders and make a final decision regarding our stake in H3C. Through our commercial contracts and equity interest, H3C has contributed a substantial amount to our EPS and free cash flow and our shareholder value in fiscal year '22. We will balance the strategic and financial benefits of a continuous involvement in China with rising risks, including geopolitical risk. We will keep you up to date as we arrive at a longer-term solution for this asset.
Our cash flow story on Slide 13, a test of our outstanding execution. Our Q4 cash flow from operations and free cash flow were $3 billion and $2 billion, respectively. 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 ahead of the competition throughout fiscal year '21 and fiscal year '22 to navigate the supply chain environment.
Our inventory balances have now peaked and are beginning to decline as we enter fiscal year '23 and deliver on our substantial order book. Our strong Q4 cash flow brought full-year '22 cash flow from operations to $4.6 billion and our free cash flow to $1.8 billion. The $1.8 billion is triple what we delivered in fiscal year '20. It is also at the midpoint of our guidance range of $1.7 billion to $1.9 billion despite the negative impact of Russia and FX that we estimate to be approximately $250 million.
Now turning to our outlook on Slide 14. As we discussed, demand for our products and services portfolio remained steady in Q4 relative to Q3. Our view remains one of enduring market demand, given the mega trends of digital transformation and the explosion of data. We also believe our own portfolio differentiation will allow market share gains.
Let me reiterate that our guidance incorporates our current thinking on the macroeconomic picture, inflationary pressure and FX risks. I would like to remind all of you that approximately 55% of our revenue is generated in foreign currencies.
For Q1 '23, we expect revenue to be in the range of $7.2 billion to $7.6 billion, which at the midpoint implies a mid-single-digit seasonal decline that we typically experience in Q1 relative to Q4 of each year. We expect GAAP diluted net EPS of $0.32 to $0.40 and non-GAAP diluted EPS of $0.50 to $0.58. While we are pleased with our Q1 outlook, we are cognizant given the macroeconomic environment and FX headwinds that it is too early at this stage to rethink our fiscal year '23 guidance.
Given the points above, we consider it prudent to assume our year may be more weighted to the first half than is typical. We are, therefore, reiterating our full-year '23 guidance. This includes revenue growth of 2% to 4% adjusted for currency; non-GAAP operating profit growth of 4% to 5%; GAAP diluted net EPS of $1.38 to $1.46; non-GAAP diluted net EPS of $1.96 to $2.04; and free cash flow of $1.9 billion to $2.1 billion. In terms of capital returns, we are maintaining our dividends and expect to buy back at least $500 million worth of shares in fiscal year '23, just like we did in fiscal year '22.
So to conclude, our results speak for themselves in a test of our outstanding execution in a quarter that can be characterized by enduring demand for our differentiated portfolio of products and services. We look forward to continuing our execution momentum in fiscal year '23.
Now with that, let's open it up for questions.