Jeremy K. Cox
Senior Vice President & Interim Chief Financial Officer at Hewlett Packard Enterprise
Thank you very much, Antonio.
We closed FY '23 with another solid performance. Our Q4 results reflect our strategic focus to diversify our business towards higher-growth, higher-margin areas of the market. The company's transformation we have undertaken several years ago to pivot to edge and cloud is paying off. And with AI exploding in 2023, we see several promising indicators as we look further in 2024 despite some unevenness in some areas of the IT market where we participate.
Q4 performance was highlighted by healthy revenues and gross margins. Revenue grew 5% sequentially in constant currency to $7.4 billion, hitting the midpoint of our Q4 revenue guidance range. Year-over-year revenue, however, was down 6% on a difficult compare to Q4 '22, during which significant order book consumption boosted our results. Q4 non-GAAP gross margin was 34.8%, which was up 170 basis points year-over-year, largely due to the increasing contribution of our Intelligent Edge segment.
Let me remind you of the deliberate targeted investment decisions we made in Q4 that I flagged at SAM, which were funded with the better-than-expected OI&E performance in the same period. The impact of this investment, along with the strong seasonal growth in HPC & AI, resulted in a Q4 non-GAAP operating margin of 9.7%. This is down 60 basis points sequentially and 180 basis points year-over-year. We expect non-GAAP operating margins to quickly recover in Q1 '24. This led to GAAP diluted net EPS to $0.49 and non-GAAP diluted net EPS to $0.52, which was at the high end of our Q4 guidance range of $0.48 to $0.52. Our Q4 free cash flow of $2.3 billion was record-breaking for the company.
HPE also delivered an impressive full year performance in FY '23. We delivered revenue growth of 5.5% in constant currency, which was at the upper end of our guidance range of 4% to 6%. Currency was a 330 basis point headwind for the year. Non-GAAP diluted net EPS of $2.15 was also at the high end of our prior guidance and well above our initial guidance from SAM 2022 of $1.96 to $2.04. FY '23 free cash flow of $2.2 billion was well above our guidance of $1.9 billion to $2.1 billion.
Let's now turn to our segment results. As a reminder, all revenue growth rates on this slide are in constant currency, and I will discuss the segments in our prior structure. The company is now operating according to our new structure. And as communicated at SAM, we plan to file restated historical financials for the new segments well before we report our Q1 '24 results.
In Intelligent Edge, we grew revenue 40% year-over-year in Q4. Demand in our core product was down sequentially on customer digestion but grew in our software-centric solutions such as our HPE Aruba Central cloud management software and in our new TAM opportunities such as our SASE security software suite. Our operating margin of 29.5% was up more than 1,600 basis points year-over-year. While very pleased with this performance, we continue to expect a mid-20% operating margin over time, as communicated at SAM 2023. And finally, we're making progress on our order book and expect to be back close to historical normal levels by midyear 2024.
In HPC & AI, Q4 revenue grew 38% year-over-year and 41% sequentially. Q4 revenue results included only a modest amount of AI revenue. On a sequential basis, the continued strength in AI demand lifted our order book in the HPC & AI segment to more than $3 billion despite our significant revenue growth in the quarter. We continue to expect double-digit revenue growth in the segment over the next three years, and we are increasingly confident we will be above trend in FY '24 with GPU supply our gating factor. Our Q4 operating margin was 4.7%, up 120 basis points year-over-year and 550 basis points sequentially. While we have much more progress to make, this does illustrate the positive benefits of scale. The early stage of the AI market, tightness in certain key accelerators and long lead times in this segment means that the HPC & AI margins will fluctuate.
Storage revenues fell 12% year-over-year on a difficult compare but rose 3% sequentially. Storage demand has now been flat to up for three straight quarters. HPE Alletra revenue grew over 50% year-over-year, and it will remain a robust growth contributor in FY '24 supported by growth in file and object storage. HPE Alletra is shifting our mix within Storage to higher-margin software subscription revenue, which is a key driver of our ARR growth. Q4 Storage operating margin of 8.1% was down 730 basis points year-over-year. Headwinds included the deferred revenue impact of the HPE Alletra subscription software, accelerated investment outpacing year-over-year revenue performance and a high mix of third-party products this quarter. Our investments in product portfolio give us confidence Storage will make progress through FY '24 toward our long-term operating profit margin target communicated at SAM 2023 of mid-teens.
Compute revenue was down 30% year-over-year on a difficult compare and down 1% sequentially. Deal elongation and customer digestion we discussed previously continued to be most prevalent in Compute. Declining AUPs from a record high in Q1 '23 was also a meaningful driver. However, two straight quarters of sequential improvement in demand lends further confidence to our FY '24 outlook. Our full year operating margin of 13.7% exceeded our target range of 11% to 13%, but the operating margin of 9.8% in Q4 was temporarily below the range. Given gross margins remain largely flat sequentially and the sequential demand increases, we continue to expect operating margins to be in the target range for FY '24.
HPE Financial Services revenues were flat year-over-year, and financing volume was $1.5 billion. Our operating margin of 8.9% was down 220 basis points year-over-year, reflecting rapid interest hikes that we are offsetting through pricing as well as asset management margins returning to normal as supply challenges ease. Our Q4 loss ratio remained steady at 0.5%.
Let's double-click on our portfolio pivot to higher-growth, higher-margin, recurring revenue and in particular, to Intelligent Edge. Even three years ago, the Intelligent Edge segment constituted just 10% of segment revenue. This year, it represented 18%. The operating profit trajectory is even more telling. The Intelligent Edge segment contributed approximately 14% of the segment's operating profit three years ago and was nearly 40% in FY '23.
In FY '24, we intend to give you a similar view combining our growth pillars of HPC & AI, Hybrid Cloud and Intelligent Edge segments. Within that, we expect the Intelligent Edge segment growth to moderate and the HPC & AI segment growth to accelerate.
Robust demand in our hybrid cloud and as-a-service offerings illustrates the durability of our portfolio shift. ARR exceeded $1.3 billion in Q4. This represented 37% year-over-year growth, which is in line with our long-term CAGR target of 35% to 45%. Storage and Intelligent Edge software and services are the fastest-growing components of ARR.
We continue to lift HPE GreenLake's value proposition with an increasing mix of higher-margin, recurring software and services revenue. Our software and services mix was 68% in the quarter. We expect this mix to increase into the upper 70% range by FY '26. This expansion is driven by the growth of subscription-based software with our products and the increased attach of our HPE operational services, which rose double digits in Q4.
The rising software and services mix is expanding our as-a-service margins. Our as-a-service orders grew 11% year-over-year in Q4 and finished the year up a solid 23% after 68% growth in FY '22. Our cumulative as-a-service TCV has now increased to nearly $13 billion. As ARR is now on a clear path to meaningful scale, we will simplify our as-a-service disclosure from ARR as-a-service orders and TCV to only ARR in FY '24.
The explosion in AI demand is driving robust growth in our APU orders. Total APU orders, which include APUs in our Compute, Cray EX and Cray XD businesses totaled $3.6 billion in FY '23, which is up from the over $3 billion we disclosed at SAM 2023. HPE Cray XD APU orders accelerated in Q3 and in Q4, reaching $2.4 billion for the year. The impressive APU server demand is also evident in our total server demand. APUs represented 25% of total server order dollars in FY '20, up from 10% in the prior year.
We will continue to disclose APU orders. However, orders can be easily north of $100 million each. Therefore, orders may be lumpy. But the key point is that we are capturing AI demand now and are well positioned for coming demand across the entire AI life cycle from training to tuning to inferencing.
Our strategy is delivering top line growth and gross margin expansion. Despite the challenging macro, ongoing product digestion and currency headwinds, a we still produced one of our highest quarterly revenue figures since 2018 while sustaining our expanded gross margin profile. Our Q4 non-GAAP gross margin rose 170 basis points year-over-year to 34.8%. And our full year non-GAAP gross margin rose 140 basis points to 35.3%. That's a more than 500 basis point improvement from FY '18.
Moving to free cash flow. In Q4, we generated $2.8 billion in cash flow from operations and $2.3 billion in free cash flow. Our $2.2 billion in free cash flow in FY '23 was above the high end of our guidance and up meaningfully from $1.8 billion in FY '22, primarily on improved earnings and net income conversion.
We exited FY '23 with a cash conversion cycle of negative four days, which exceeded our expectation for neutral we communicated at SAM. Strong working capital management in Q4 and reduced transformation costs in FY '23 drove an improvement in our conversion of non-GAAP net earnings to free cash flow to approximately 80% in FY '23. Continued progress in FY '24 and beyond leads us to expect to reach 90% by FY '26.
We reiterate our FY '24 free cash flow guidance from SAM of $1.9 billion to $2.1 billion. And we returned over $1 billion in capital to shareholders in FY '23, including $421 million in share repurchases. While certain price and volume parameters of our trading program limited us to below our $500 million target in FY '23, we reiterate our goal of returning 65% to 75% of free cash flow to shareholders between FY '24 and FY '26.
Before we dive into our outlook, let me remind you that we will exclude H3C earnings and gain on sale from our non-GAAP results in FY '24, as we noted at SAM. We continue to expect the process to conclude and the receipt of the cash proceeds in the first half of calendar 2024.
For Q1, we expect revenues in the range of $6.9 billion to $7.3 billion. This incorporates historical seasonality in our overall business, including in the HPC & AI segment after its strong Q4. We expect AI revenue acceleration to drive sequential growth in HPC & AI and total HPE revenue in Q2 '24. We expect GAAP diluted net EPS between $0.24 and $0.32 and non-GAAP diluted net EPS between $0.42 and $0.50.
We're reiterating our prior year 2024 guidance of 2% to 4% revenue growth in constant currency. We expect OI&E, which as noted excludes H3C going forward, to be a headwind of approximately $300 million and our non-GAAP structural tax rate to be 15%. Our full year GAAP diluted net EPS guidance of $1.81 to $2.01 is $0.02 lower than our prior view as a bit of transformation costs slipped into FY '24.
We are reiterating our full year non-GAAP diluted net EPS guidance of $1.82 to $2.02. We also reiterate free cash flow guidance of between $1.9 billion and $2.1 billion. We continue to believe our FY '24 performance will be weighted to the second half of the year as GPU supply improves. We are increasing our dividend by 8% in FY '24 and intend to return 65% to 75% of free cash flow to shareholders this year.
So to conclude, while there continues to be unevenness in some areas of the IT market, our investment in growing areas of our portfolio is paying off. We are confident in our ability to continue to capture the AI explosion in demand. AI also opens broader customer discussions about the benefits of AI inferencing at the edge and the need to be hybrid by design. Our HPE GreenLake cloud platform, our AI native portfolio and our services expertise are perfectly aligned to the needs of our customers that we believe will turn into profitable growth for our shareholders.
Now let's open it up for questions.
