Marie Myers
Executive Vice President & Chief Financial Officer at Hewlett Packard Enterprise
Thank you, Antonio, and good afternoon. We ended fiscal 2024 on solid footing and exceeded what we said we would do. We achieved record quarterly revenue, delivered solid profitability, and generated free cash flow above our guidance. We executed well in a dynamic environment, growing revenue sequentially in each segment as investments in AI are leading to infrastructure refreshes. In Q4, we also maintained disciplined cost management and improved non-GAAP operating profit. A few highlights from our 2024 results. We grew AI systems revenue more than 150% to $4.1 billion and met our server non-GAAP operating margin target. We continued our product transition within storage and ended the year with Alletra MP accounting for a meaningful portion of total storage orders. Our transition to more software-defined storage will drive a greater mix of higher-margin recurring revenue over the long term.
Lastly, in Intelligent Edge, we rightsized our cost structure as we navigated a digestion period. We grew fiscal 2024 revenue 3% to $30.1 billion, exceeding the high end of the outlook range we provided in September. Non-GAAP diluted net EPS of $1.99 and free cash flow of $2.3 billion both came in above our revised outlook ranges. In total, we returned $826 million to shareholders via dividends and share repurchases. Overall, our results reflect focused execution and improving demand as customers implement AI strategies. Let me dive into the details of the quarter. We delivered record quarterly revenue and our second highest non-GAAP diluted net EPS, both of which came in above the high end of guidance. Total revenue grew 15% year-over-year and 9% quarter-over-quarter to a record $8.5 billion. Growth in the quarter was led by strong conversion of AI systems backlog, refreshes in traditional compute, better-than-expected performance within Hybrid Cloud, and a continued recovery in networking.
We are pleased to report non-GAAP diluted net EPS of $0.58, above the high end of guidance despite dilution from the issuance of our convertible preferred securities in September, which was not factored into our outlook. ARR grew 48% year-over-year to $1.9 billion, nearly doubling since Q1 2023, primarily driven by HPE GreenLake. We added approximately 2,000 new HPE GreenLake customers during the quarter, ending the year with approximately 39,000 unique customers. I am happy to report continued demand for our differentiated AI system offerings, which resulted in strong double-digit sequential revenue growth to $1.5 billion. This record contribution from AI systems revenue, combined with lower mix of Intelligent Edge, drove gross margin down 390 basis points year-over-year and 90 basis points quarter-over-quarter to 30.9%.
Non-GAAP operating expenses decreased 9% year-over-year as reported and were down $5 million quarter-over-quarter as we focus on streamlining our cost structure and are closely managing discretionary expenses. Non-GAAP operating margin was 11.1%, up 140 basis points year-over-year and up 110 basis points sequentially. Strong profitability rolled through to free cash flow, which exceeded our expectations and totaled $1.5 billion. Fiscal 2024 free cash flow was $2.3 billion, our highest ever for the full year. GAAP diluted net EPS of $0.99 and non-GAAP diluted net EPS of $0.58 were both above guidance, benefiting from better-than-expected OI&E and expense management. GAAP EPS benefited primarily from a lower than previously expected tax expense on our aggregated H3C dispositions. Non-GAAP diluted net EPS excludes the gain we recognized on the partial sale of our H3C investment at $162 million in net costs, primarily from stock-based compensation expense, acquisition and other related charges and amortization of intangibles.
Now let's turn to the segment results. Our server business was a key driver of record quarterly revenue and grew double digits year-over-year for the third consecutive quarter. Server revenue achieved an all-time high of $4.7 billion, up 31% year-over-year and up 9% quarter-over-quarter with sequential growth in AI systems and traditional servers. The traditional compute business continued its momentum during the quarter and grew sequentially for the fourth consecutive quarter, driven by ongoing refreshes to our Gen11 server products, which carry higher AUPs. Adoption has been strongest in North America and Europe as customers are investing in new workloads.
In the fourth quarter, Gen11 accounted for more than two-thirds of our core compute revenue and contributed to AUP growth. In AI systems, we continue to grow the business to new highs. AI systems orders during the quarter were in line with our expectations at approximately $1.2 billion. However, we had an order book in Q4, leaving our net orders for the quarter at approximately $500 million. Subsequent to the end of the quarter, we have received orders that bring our current backlog to over $3.5 billion. As we have mentioned before, AI systems orders can be lumpy and this is an example of that. Fourth quarter server operating margin was 11.6%, up 150 basis points year-over-year and up 80 basis points quarter-over-quarter.
Moving to Hybrid Cloud, we grew revenue 18% year-over-year and 21% quarter-over-quarter to $1.6 billion, materially exceeding our guidance of a slight revenue increase. Revenue growth was led by Private Cloud and the continued ramp of Alletra MP. During the quarter, we received our first orders for Private Cloud AI as we target a growing pipeline that includes corporations across verticals and regions. Interest is strong in manufacturing, education, and financial services. We have also deployed Private Cloud AI internally and are moving use cases from the public cloud due to better cost performance and compliance.
In storage, we are balancing investments in owned IP products against market trends. Alletra MP remains ahead of our expectations and is the fastest ramping storage product in our company's history. Keep in mind, these sales carry a higher portion of deferred software and services revenue, which takes longer to translate to the P&L but benefits margins long term. Hybrid Cloud operating margin was 7.7%, up 390 basis points year-over-year and up 260 basis points sequentially, predominantly due to better OpEx controls.
Now on to Intelligent Edge. We believe the business remains at a path of recovery and customers have largely digested excess inventories. Total Intelligent Edge revenue was $1.1 billion, down 20% year-over-year and essentially flat quarter-over-quarter. Sequentially, we saw growth in services, WLAN products and software, partially offset by declines in switching and campus. Importantly, we are seeing more large deals in our pipeline, giving us confidence that demand is improving. Keep in mind, we were still benefiting from the drawdown of networking backlog in Q1 of fiscal 2024. Operating margin of 24.4% was down 270 basis points year-over-year but up 200 basis points quarter-over-quarter due to lower OpEx in line with our expectations.
Lastly, Financial Services. Our Financial Services business generated $893 million of revenue, up 2% year-over-year and up 1% quarter-over-quarter. Financing volumes increased 41% year-over-year to a new all-time high of $2.1 billion. Our Q4 loss ratio remained steady near 0.5% and return on equity totaled 17%. Operating margin was 9.2%, up 120 basis points year-over-year and up 20 basis points quarter-over-quarter.
Moving to cash flow and capital allocation. We generated strong operating cash flow of $2 billion and free cash flow of $1.5 billion in the quarter, both of which exceeded our expectations due to higher revenue and increased collections. For the full year, free cash flow was a record $2.3 billion, above our guidance of $1.9 billion. Q4 cash conversion cycle was a negative 12 days, down eight days from Q4 '23 and down 16 days from last quarter. Inventory ended the year at $7.8 billion, up 2% quarter-over-quarter due to the nature of our AI systems business. We are focused on reducing inventory during fiscal 2025 as we convert AI systems backlog and grow our storage business.
During Q4, we returned $169 million via dividends and $50 million via share repurchases to common shareholders, respectively. We returned a total of $826 million during the full year. Moving to our outlook for fiscal Q1 2025. As Antonio said, we expect to close the Juniper transaction in early 2025, at which time we will provide combined company guidance for fiscal 2025. However, let me provide some high-level thoughts as to how we are thinking about the upcoming year. Overall, customer conversations indicate higher IT spending in 2025 with multiple tailwinds that should contribute to revenue growth. We expect continued recovery in traditional compute and growing adoption of AI systems by enterprises and sovereigns, although we expect orders to remain competitive and lumpy.
In Hybrid Cloud, we are beginning to see customers accelerate digital transformation projects in order to execute on AI strategies. And in networking, we expect demand will modestly recover throughout the year. For the first quarter, we expect year-over-year revenue growth to be in the mid-teens. On a sequential basis, this is in line with normal seasonality. We expect server revenue to be down quarter-over-quarter. We expect flat to modest growth sequentially in traditional compute and lower AI systems contribution following a very strong quarter. Server operating margin will be closer to 10% to 11% as customers navigate the transition to next-gen GPUs. In Hybrid Cloud, we expect a sequential decline in the first quarter due to stronger-than-seasonal growth in Q4, with operating margin in the mid-single-digit range. And in networking, we are still managing prolonged sales cycles and expect the business to be around historical seasonality of flattish sequential growth. We expect Intelligent Edge operating margin to be in the low 20% range due to mix.
Gross margin will benefit from a more favorable revenue mix, and we expect a modest sequential decrease in OpEx. OI&E is expected to positively contribute to the bottom line with higher net interest income more than offsetting $0.02 of headwinds associated with the cost of our Juniper financing. Overall, we estimate Q1 GAAP diluted net EPS to be between $0.31 and $0.36 and non-GAAP diluted net EPS to be between $0.47 and $0.52 based on 1.4 billion diluted weighted average shares outstanding, including $76 million of dilution from our convertible preferred securities. For free cash flow, we typically consume cash in the first quarter. We intend to procure components needed to meet current and future AI systems demand while continuing to manage inventory. For Q1, we intend to buy back shares of common stock at a similar pace to Q4. We remain committed in the long term to our balanced capital allocation framework, our dividend, and our investment-grade rating.
In summary, we delivered strong Q4 results and ended fiscal 2025 well positioned to drive profitable growth and generate free cash flow that we can reinvest into the business while also returning capital to shareholders. With that, I'll turn it over for Q&A.
