Tarek Robbiati
Executive Vice President and Chief Financial Officer at Hewlett Packard Enterprise
Thank you very much, Antonio. I'll start with a summary of our financial results for the second 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 and 2. So now let me discuss our Q2 performance details starting with Slide 3.
We continue to see robust demand across our differentiated edge-to-cloud portfolio with order growth up 20% year-over-year, the same as last quarter. This marks our fourth quarter in a row with order growth of 20% or better year-over-year. This maintains our confidence in achieving both our fiscal year '22 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. We delivered Q2 revenues of $6.7 billion, up 1.5% year-over-year and in line with our outlook of normal sequential seasonality despite a more challenging supply environment that limited upside.
The unexpected COVID-related shutdowns in China and ceasing the support of Russia services contracts impacted our revenue by more than $250 million in the quarter, our total operating margins by more than one point and EPS by approximately $0.06. Given the delta between our order and revenue growth rates, our backlog further increased to new record levels and yet remains very high quality. The order book is firm and most importantly, has been priced to preserve gross margins. We are particularly pleased with the resiliency 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 34.2%, up 30 basis points sequentially and down just 10 basis points 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 9.3%, reflecting the revenue impact from incremental supply constraints and our exit from Russia that reduced operating leverage. We expect operating margins to expand in the short-term as we drive more leverage from revenue growth and benefit from investments in the high-growth margin-rich areas of our portfolio.
Within other income and expense, we benefited from robust operational performance in H3C and further gains related to increased valuations in our Pathfinder investment portfolio. As a result, we now expect non-GAAP other income and expense for fiscal year '22 to be an income of approximately $75 million versus prior guidance of an approximately $25 million income. Given our strength in gross margin and despite the approximately $0.06 impact from China and Russia, we delivered non-GAAP diluted net earnings per share of $0.44, near the midpoint of our outlook range of $0.41 to $0.49 for Q2.
We also delivered GAAP earnings per share of $0.19. This includes $126 million of disaster charges related to Russia, primarily consisting of an increased reserve for financing lease assets. With the decision to orally [Phonetic] exit Russia that we have announced today, we expect to record an additional and less significant GAAP-only charge in Q3 that has been factored into our updated outlook already. As previously indicated, we expected free cash flow to be in line with our normal seasonality that is a use of cash in the first half and Q2 was a use of cash of $211 million. We have made significant investments in working capital during the first half, reflecting our strategic inventory actions to navigate the current supply environment. This will better position us to convert orders into future revenue and cash flow, while working capital is expected to become a tailwind in the second half.
Finally, we continue to return substantial capital to our shareholders. We paid $156 million of dividends in the current quarter and are declaring a Q2 dividend today of $0.12 per share payable in July. We also repurchased $58 million in shares, bringing our year-to-date total capital returns to $498 million, reflecting our confidence in future cash flow generation.
Slide 4 highlights key metrics of our growing as-a-Service business. We continue to see very strong momentum across our as-a-Service portfolio, where we introduced 12 new cloud services this quarter and converged Aruba Central with the HPE GreenLake platform to create a unified operational experience for all users. Total as-a-Service orders were up 107% year-over-year, marking the third quarter in a row with orders more than doubling. Our ARR was up 25% year-over-year to $829 million, with supply constraints continuing to limit some installations.
While our ARR growth is somewhat volatile in the current supply environment, the strong order growth over the last several quarters is the best indicator of the long-term health of this business. This gives us confidence in delivering our 35% to 45% CAGR target from fiscal year '21 to fiscal year '24, with increasing margins as our mix of both software and services continues to increase to 64% in Q2, up more than five points year-over-year with our expanding cloud and SaaS offerings.
Let's now turn to our segment highlights on Slide 5. Our growth businesses continue to show improving top-line momentum and record levels of backlog fueled by strong demand. In the Intelligent Edge, demand for our secure connectivity solutions accelerated with orders growing 45% year-over-year, the fifth consecutive quarter with growth of more than 35%. Despite increased supply disruptions in China, revenue grew 9% 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 12.6%, reflecting higher component and logistics costs, resulting in lower operating leverage. We expect margins to improve next quarter with higher levels of revenue that also benefit from previous price actions that are sticking. In HPC & AI, demand remains robust with order growth of 18% year-over-year, driving our awarded contracts total to another record level of just under $3 billion. Revenue grew 5% year-over-year and was impacted by one large customer acceptance delay that impacted growth by more than six points and has now been delivered in Q3. Importantly, our Q2 operating profit was impacted by the ramp in project costs for a couple of mega deals expected to close by the end of the year that will return operating margins to more in range with historical levels.
In Compute, order growth remained robust and was up over 20% year-over-year for the fourth consecutive quarter, while revenue growth was up 1%, reflecting a more difficult supply environment. We continue to be very focused on executing a dynamic pricing strategy that has been effective in managing the increased supply and logistics costs and gives us a very high-quality backlog. The results are showing up in our operating margin performance at 13.9%, up 270 basis points year-over-year and 10 basis points sequentially, well above our long-term target set at SAM 2021 of 11% to 13%.
Within Storage, we achieved another record level of product backlog that is skewed towards our owned IP margin-rich products. Revenue was down 2%, reflecting supply constraints for our own IP products. As a result, we continue to have unfavorable revenue mix that pressured our margins this quarter. We expect both our revenue growth rates and margins to improve over the next few quarters as we work through our favorable backlog mix and steer more demand towards our new Electra and Block Storage offerings. With respect to Pointnext Operational Services, including storage services, orders again grew mid single-digits year-over-year as reported similar to levels for total fiscal year '21.
As you know, this is very important for the long-term health of our most profitable business. Within HPE Financial Services, volume increased 2% year-over-year with strong performance in GreenLake and revenue was flat. Our profitability continues to benefit from higher residual value realization as customers tend to extend the use of their systems in a supply-constrained environment. Our operating margin was 12.6%, up 180 basis points from the prior year, and our return on equity at 20.4% remains well above the 18% plus target set at SAM 2021.
Slide 6 highlights our revenue and EPS performance, where you can see we've maintained relatively constant levels from last year despite incremental supply constraints, in particular, from the China shutdowns and also our ceasing to support services contracts in Russia. As a reminder, this combines for more than a $250 million impact to revenue and a one point impact to total operating margins and an approximately $0.06 impact to EPS in Q2. In spite of these headwinds, we delivered a better quality of earnings across our portfolio as we continue to execute our edge-to-cloud strategy.
The improved quality of earnings can be seen on Slide 7, where we delivered non-GAAP gross margins in Q2 of 34.2%, 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've been driving towards edge and our as-a-Service business.
Moving to Slide 8, you can see our non-GAAP operating margin this quarter of 9.3%, reflecting the reduced operating leverage from supply challenges and our exit from Russia. However, we are achieving much better efficiency in our sales and office investments when measuring productivity on an orders basis. Given our high-quality backlog, we are also continuing to invest more in both R&D and our go-to-market for future growth.
On Slide 9, let's spend some time reminding everyone about our unique setup in China through H3C. As disclosed in an 8-K in late April, we have extended our existing put option that is struck at 15 times trading 12-month earnings through to October 31, 2022. We did this to enable the new investors at the Unigroup level to complete their restructuring, which is proceeding as planned before determining a longer-term path forward for our stake.
We value our presence in China, the second largest and fastest-growing IT market. Although we will balance prior to execution of any extension, 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 32% in this Q2 of fiscal year '22. We will keep you up to date as we arrive at a longer-term solution for this valuable asset.
Turning to Slide 10. Our free cash flow was a use of cash of $211 million. This is aligned to our normal pre-pandemic seasonality with the first half being a use of cash followed by a strong generation of free cash flow in the second half. The first half of this year has also been uniquely impacted by the supply chain environment as we strategically built inventory levels in Q1 that were flat in Q2.
We are taking further strategic actions to improve supply chain visibility and attain operational and financial benefits. This will put us in a better position to begin converting orders and generate healthy amounts of cash as working capital will turn into a tailwind in the back half of the year. We will need to demonstrate strong execution in the second half, but we have a path forward and expect to deliver fiscal year '22 free cash flow of $1.8 billion to $2 billion.
Now turning to our outlook on Slide 11. We are revising our fiscal year '22 non-GAAP outlook range back to our original outlook provided at SAM of $1.96 to $2.10. This reflects the impacts of a more unfavorable currency movements since last October, the exit of the business in Russia, the COVID-related disruptions in China to this date, offset by the other income and expense benefit we've received in the first half. From a top-line perspective, we are very pleased with the continued strength in orders and growing backlog that gives us confidence in future revenue growth in fiscal year '22 and beyond.
We do want to remain prudent in the short-term, given the ongoing supply challenges that we believe will likely last well into next year. Currency is also expected to now be a two-point headwind to revenue for the full-year as opposed to the 50 basis points at the start of our fiscal year. As a result, we still have strong confidence in our fiscal year '22 revenue growth outlook of 3% to 4% adjusted for currency and expect to end the year with elevated levels of backlog, which bodes well for fiscal year '23.
More specifically for Q3 '22, we expect revenue to be up low single-digits sequentially. This is slightly below our normal seasonality to reflect our expectations that the China shutdowns will have a lingering impact in the short-term. As a result, for Q3 '22, we expect GAAP diluted net EPS of $0.22 to $0.32 and non-GAAP diluted net EPS of $0.44 to $0.54. So overall, I'm pleased with how we are executing in a strong demand but challenging supply environment during the first half of fiscal year '22. With our high-quality backlog, we are very well positioned to capitalize on the ongoing edge-to-cloud opportunity and deliver against all of our financial commitments set at SAM 2021.
Now with that, let's open it up for questions. Thank you.
