Tarek Robbiati
Chief Financial Officer at Hewlett Packard Enterprise
Thank you very much, Antonio. I'll start with a summary of our financial results for the first quarter of fiscal year 2022. As usual, I will 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 Q1 performance details starting with Slide 2. We are off to a good start delivering against our commitments for fiscal year '22 with strong momentum continuing to build across the business. The demand continues to be robust for our differentiated edge-to-cloud portfolio with order growth up 20% year-over-year, marking our third quarter in a row with order growth at or above 20% year-over-year. This bolsters our confidence in achieving both our fiscal year '22 revenue outlook of 3% to 4% adjusted for currency and our longer term 2% to 4% revenue CAGR outlook provided at our 2021 Securities Analyst Meeting.
We delivered Q1 revenues of $7 billion, up 2% year-over-year and in line with our outlook of normal sequential seasonality despite a continuously challenging supply environment. As a result, our backlog further increased to record levels with a firm order book that shows no signs of double ordering or any noticeable cancellations. We were particularly pleased with the quality of our earnings, including the resiliency of our gross margins despite the ongoing supply constraints that are driving up material and logistics costs.
We delivered non-GAAP gross margin of 33.9%. up 90 basis points sequentially and 20 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 margin has also been resilient at 11%, slightly down 30 basis points year-over-year, but up 130 basis points sequentially. We're achieving all of the expected savings from our cost actions announced mid-pandemic, while continuing to make investments in our high growth, margin-rich areas of our portfolio to fuel further revenue and profitability.
Within other income and expense, we benefited from further strong gains related to increased valuations in our investment portfolio and robust operational performance in HPC. As a result, we now expect non-GAAP other income and expense for fiscal year '22 to be an income of approximately $25 million versus prior guidance of a $20 million to $40 million expense. As a result of our strength in margins that more than offset the continued supply challenges, we delivered non-GAAP EPS of $0.53, well above the high end of our outlook range of $0.42 to $0.50 for Q1. As previously indicated, we expected free cash flow to be in line with our typical seasonality that is lowest in Q1 with the use of cash of $577 million for this quarter. We also continue to take strategic inventory actions to navigate the current supply environment. Our inventory is now up $2.5 billion year-over-year to $5.3 billion in support of the substantial order book that we have. This will better position us to convert orders into future revenue and cash flow.
Finally, we continue to return substantial capital to our shareholders. We paid $155 million of dividends in the current quarter and are declaring a Q2 dividend today of $0.12 per share payable in April. We also repurchased $129 million in shares during Q1, reflecting our confidence in future cash flow generation.
Slide 3 highlights key metrics of our growing as-a-Service business. We made meaningful progress during Q1. We added more than 100 customers and well over $500 million of total contract value that brings the current total TCV to more than $6.5 billion. Total as-a-Service orders were up 136% year-over-year. As a proof point of our as-a-Service pivot momentum, as-a-Service order growth has accelerated every quarter going back to Q1 of last year. Our ARR was up 23% year-over-year to $798 million with supply constraints limiting some installations. While our ARR growth might be somewhat volatile in the current supply environment, the strong accelerated -- accelerating order growth over the last several quarters is the best indicator of 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 continue to increase to 64% in Q1, up more than 4 points year-over-year.
Now, let's 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, demand for our secure connectivity solutions continued unabated with orders growing more than 35% year-over-year the fourth consecutive quarter. Despite increasing supply constraints, revenue grew 11% year-over-year with strength across the portfolio. Both wired switching and wireless LAN grew approximately 10% with Aruba Services up even stronger driven by our edge as-a-Service offerings up strong double digits. We also delivered strong operating margins of 17.4%. This is a 650 basis point sequential improvement despite higher component and logistics costs, demonstrating that our price actions are sticking.
In HPC & AI, demand remains robust with product order growth of more than 20% year-over-year, driving our awarded contracts total to another record level of approximately $2.7 billion. Revenue grew 4% year-over-year, but was impacted by two large customer acceptance delays that impacted growth by more than 10 points in Q1 and are now on track to be delivered in Q2. Our Q1 operating profit was obviously also impacted by these push-outs and we expect operating margins to return to more in range with historical levels going forward.
In Compute, order growth was up over 20% year-over-year for the third consecutive quarter, while revenue growth was flat, reflecting the difficult supply environment. We have been very focused on executing a dynamic pricing strategy that has been effective in managing the increased supply and logistic costs. The results are showing up in our operating margin performance at 13.8% up 240 basis points year-over-year and 440 basis points sequentially, well above our long-term target of 11% to 13%.
Within Storage, product order growth was up in the high-teens year-over-year. This was the fourth quarter in a row of 15% or better year-over-year product order growth. Revenue was down 3%, reflecting increasing supply constraints, particularly for our owned IP products. As a result, we had an 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 continue to shift our portfolio towards higher margin products and supply constraints ease.
With respect to Pointnext operational services, including storage services, orders grew mid-single digits year-over-year as reported similar to levels for total fiscal year '21. As you know, this is a very important for the long-term health of our most profitable business. Within HPE Financial Services, volume increased 11% year-over-year and revenue was down 1%. Our write-offs as a percentage of assets, excluding the impact of two frauds in the U.K. and Asia-Pacific was 47 basis points, which is below pre-pandemic levels. Our profitability also continues to benefit from higher residual values realization and lower borrowing costs as we continue to securitize our U.S. portfolio via the ABS market.
Our operating margin was 12.4%, up 260 basis points from the prior year and our return on equity at 19.7% remains well above the 18-plus percent target set at SAM 2021. Slide 5 highlights our revenue and EPS performance, where you can clearly see the strong rebound from last year and sustained momentum entering fiscal year '22, and this, despite a more supply-constrained environment versus a year ago. We are also delivering a better quality of earnings with our portfolio mix continuing to shift to our higher growth and higher margin businesses as we execute our edge-to-cloud strategy.
Turning to Slide 6. We delivered non-GAAP gross margins in Q1 of 33.9%, up both year-over-year and sequentially despite all of the increased component and logistic costs. This was driven by both strong pricing discipline and the favorable mix shift we've been driving towards edge and our as-a-Service business.
Moving to Slide 7. You can see our non-GAAP operating margin this quarter of 11%, representing a 130 basis point sequential increase. We also delivered roughly the same operating profit versus last year despite the more challenging supply environment, while continuing to invest significantly more in both R&D and our go-to-market for the future thanks to a much better quality of earnings and gross margins.
Turning to Slide 8. Our free cash flow was a use of cash of $577 million. This is more aligned to our typical pre-pandemic seasonality if you look at Q1 in fiscal year '20 or the prior years. Cash flow in Q1 of this year has also been uniquely impacted by the supply chain environment as we have strategically continued building inventory levels. This will better position us to begin converting orders and generate healthy amounts of cash in the back half of the year, reflecting also our typical seasonality. We, therefore, continue to expect to deliver fiscal year '22 free cash flow of $1.8 billion to $2 billion.
Now, turning to our outlook on Slide 9. Given our strong performance in Q1 and building momentum across the business, I am pleased to announce that we are raising our full-year non-GAAP diluted net EPS outlook range for fiscal year '22 by $0.07 at the midpoint to $2.03 to $2.17. From a top-line perspective, we were 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 also want to remain prudent in the short term given the ongoing supply challenges, so we continue to believe we're likely last well into the second half of the calendar year. As a result, we still have strong confidence in our fiscal year '22 revenue outlook of growth of 3% to 4% and expect to end the year with elevated levels of backlog, which bodes well for fiscal year '23. More specifically, for Q2 '22, we expect revenue to be in line with our normal sequential seasonality of down low to mid single digits and are comfortable with current consensus. As a result, for Q2 '22, we expect GAAP diluted net EPS of $0.18 to $0.26 and non-GAAP diluted net EPS of $0.41 to $0.49.
So, overall, I am very pleased with our first quarter of fiscal year '22. Our edge-to-cloud strategy is resonating with customers and driving strong demand across our portfolio. This enabled us to deliver a good start to the fiscal year with increasing momentum and a raised outlook. We are very well positioned to capitalize on the ongoing 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.
