Earnings Call Transcript - HPQ Q3 2021

Operator, Operator

Good afternoon. And welcome to the HP Inc. Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Beth Howe, Head of Investor Relations. Please go ahead.

Beth Howe, Head of Investor Relations

Good afternoon, everyone, and welcome to HP's Third Quarter 2021 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer, and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is being webcast. A replay of this webcast will be made available on our website shortly after the call for approximately one year. We posted the earnings release and the accompanying slide presentation on our Investor Relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials related to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now, and could differ materially from the amounts ultimately reported in HP's Form 10-Q for the fiscal quarter ended July 31st, 2021, and HP's other SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd like to turn the call over to Enrique.

Enrique Lores, President and CEO

Thanks, Beth. Good afternoon, everyone, and thank you for joining the call. I hope that you and your families are safe and well. It's an important time for us to connect. The hybrid world taking shape is expanding our addressable market and creating new opportunities to drive profitable growth. We have already started to capitalize on this and have a long runway ahead. This is evident in our Q3 performance. We delivered another quarter of top and bottom-line growth with EPS growing substantially faster than revenue. This reflects continued progress against our strategic priorities and strong and sustained demand for our products and services. In Q3, we delivered revenue of $15.3 billion, an increase of 7%. Our non-GAAP net earnings increased 71% to $1.2 billion. Non-GAAP EPS increased to $1 compared to $0.49 in Q3 last year. And we generated $1 billion of free cash flow, returning $1.7 billion to shareholders. Before I take you through the highlights, I want to first share three key points of context as you think about our performance and outlook. First, as I mentioned, we continue to see strong demand for our products and services. The hybrid world is accelerating trends in our segments, and our leadership across commercial and consumer categories positions us well, even as demand continues to outpace supply. The second point is that we continue to ship as much products as we can while navigating a complex operational environment. We are managing through component shortages, COVID-related factory lockdowns in Southeast Asia, and congested ports and transportation disruptions. Even under these conditions, we delivered solid financial results. And third, we are performing while transforming our business models and service offerings to capitalize on emerging growth opportunities. We have continued to make progress in reducing our fixed cost structure, evolving our business model, and creating new growth businesses. And we are expanding our time in key segments to drive additional top and bottom-line growth. In Personal Systems, we will be driven by our focus on peripherals and new computing models. In Printing, we are expanding our services and subscription offerings. I will talk about all of these in more detail by looking at the progress we're making across our portfolio. In Personal Systems, demand for our products continued to be strong with our backlog increasing again quarter-on-quarter. PC penetration rates are growing across our markets, as devices become increasingly essential in today's hybrid world. While we delivered strong operating profit, PS revenue was less than we expected primarily because of our supply chain constraint. We expect industry-wide supply shortages, particularly in ICs, to continue into 2022. Given these, we have identified the necessary improvements we need to make and are accelerating that execution to drive stronger top-line performance. We expect that it will take more than one quarter to show results. As we ramp supply, our PS portfolio is extremely well-positioned for the hybrid world, and we see significant opportunities for market expansion. And our leading share in commercial PCs positions us well as more businesses reopen. In the commercial market, we launched a new all-in-one and expanded our ZBook portfolio of high-performance PCs for Creative Professionals. This includes the ZBook Studio G8, the world's most powerful mobile workstation of its size. And our new civil power brings ZBook performance to students, SMB, and the public sector. In Q3, we also launched a new Pavilion lineup that brings premium computing experiences into the mainstream with a series of new displays that are purpose-built for home-office and entertainment setup. We continued to drive momentum outside of our core hardware businesses. This quarter, we completed our acquisition of HyperX, giving us a leading position in gaming peripherals and a platform from which to accelerate our peripheral leadership more broadly. We also continue to advance our device as a service business, which grew 32% in the quarter. We are investing to meet emerging customer needs in the commercial space. This is highlighted by our recent agreement to acquire Teradici Corporation. Teradici Software is widely used by leading organizations around the world to deliver superior remote computing solutions. We expect this deal will accelerate new computer models and services tailored for a hybrid work environment. In Printing, revenue was up 24% driven by recovery in commercial and strength in consumer. As in Personal Systems, the rise of all things hybrid plays to our strengths and is creating new opportunities for print innovation and growth. Specifically, we are expanding our services and subscription offerings, each of which delivered double-digit growth this quarter. We continued to sell HP+ and Instant Ink across North America and Europe, including the addition of HP+ on the Envy and DeskJet product family. We have seen positive response to HP+ to date. And HP's Instant Ink hit a major milestone by surpassing 10 million subscribers. Our subscription services are providing a simple and seamless experience for today's hybrid workers, paving the way for new offerings in the future. We continued to evolve our hardware portfolio with success in our award-winning HP LaserJet 400 and 500 Series. HP continues to be recognized as a Best Managed Print vendor, helping SMB solution providers thrive in a competitive market where quality and security are essential. The strength of our position in the commercial market is significant as more people return to the office. In our industrial businesses, we drove very strong hardware revenue growth in the quarter. Importantly, our number of pages printed is at or above 2019 levels. We once again saw double-digit growth in print impressions and square meters, as well as strength in key categories like labels and packaging. In 3D, we remain focused on driving high-value end-to-end applications in strategic vertical markets. This quarter, we launched the new Arize Orthotic Solution. It leverages HP 3D printing and cloud-based software to help the millions of patients who suffer from foot pain. It is a great example of the opportunity we see to develop industries with highly personalized solutions. Our combination of innovation and execution enables us to continue making progress across our business and portfolio. And we remain committed to generating strong cash flow and to value-creating capital allocation. This includes our robust share repurchase and dividend program and disciplined organic and inorganic investments. In Q3, we returned $1.7 billion to shareholders and have returned $6.8 billion over the past 12 months. We believe our shares remain undervalued and are committed to aggressive repurchase levels of at least $1.5 billion in Q4. As part of our value creation strategy, we also remain focused on M&A that can accelerate our growth in strategic areas. HyperX and Teradici are two great examples. We will continue using our rigorous returns-based framework to evaluate and pursue deals that complement our strategy and accelerate new sources of value creation. As we drive our portfolio strategy and transformation agenda, we continue to prioritize making a sustainable impact. This quarter, we released our 20th Annual Sustainable Impact report that highlights the work we are doing in climate action, human rights, and digital equity, and outlined new 2030 goals. Not only is this the right thing to do, it's also driving business success. In 2020, our Sustainable Impact Initiative helped us win more than $1 billion in new sales for the second consecutive year. Aligned with this, we recently issued $1 billion in sustainability bonds. We are allocating these proceeds to ESG-related initiatives consistent with our strategy and values. Looking ahead to Q4, our backlog remains significantly elevated. We expect robust demand to continue, and we are taking decisive steps to address operational headwinds. Our portfolio is strong and resilient, and we remain on track to significantly exceed the full-year EPS target we set in February. Today, we are raising our Q4 outlook. More importantly, we plan to build on this performance and expect to grow full-year EPS in fiscal year '22. Longer term, the hybrid world plays to our strengths and creates attractive opportunities across our categories. We are well-positioned to drive sustained performance but we innovate, improve, and continue to reinvent for our customers, partners, and shareholders. I look forward to our upcoming October analyst meeting to discuss our strategy and our plans to drive continued business success.

Marie Myers, CFO

Thanks, Enrique. Looking at our third-quarter financial results, we delivered another solid quarter of revenue growth with Operating Profit and EPS growing substantially faster. We are continuing our transformation journey while generating strong free cash flow, returning significant capital to shareholders, and investing for long-term value creation. Looking at the details of Q3, net revenue was $15.3 billion, up 7% nominally and 4% in constant currency. Regionally in constant currency, America has increased 12%, EMEA increased 1%, and APJ declined 6%. Supply chain constraints affected both Print and Personal Systems revenue, and this was particularly impactful in EMEA and APJ in Personal Systems. Across Personal Systems and Print, we continued to see strong demand for our products and solutions, capitalizing on opportunities we see as the hybrid world takes shape. The gross margin was 22.2% up 5.5 points year on year. The increase was primarily driven by continued favorable pricing, including lower promotions, as well as a reduction to previously estimated sales and marketing incentives, as well as currency partially offset by higher costs. Non-GAAP operating expenses were $1.9 billion, or 12.4% of revenue. The increase in operating expenses was primarily driven by increased investments in go-to-market and innovation, as well as higher variable compensation due to the very strong performance this fiscal year as compared to 2020. Non-GAAP net OI&E expense was $78 million for the quarter. Non-GAAP diluted net earnings per share increased from $0.51 to $1, including $0.25 related to the reduction in previously estimated incentives of which $0.12 were reinvested during the quarter, primarily at accelerating R&D, incremental marketing, and our hybrid work strategy. Non-GAAP diluted net earnings per share exclude net expense totaling $90 million, primarily related to restructuring and other charges, amortization of intangibles, acquisition-related charges, debt extinguishment costs, other tax adjustments, partially offset by non-operating retirement-related credits. As a result, Q3 GAAP diluted net earnings per share was $0.92. Before I get into the details of the segments, let me briefly address the reduction in previously estimated sales and marketing program incentives. Consistent with our policies, we review these estimates every quarter. We estimate incentives based on a number of factors like historical experience, customer behavior, and market conditions. The change in estimate is a result of lower-than-expected incentives due to increased supply constraints, shifts in customer behavior, and the evolving impact of the COVID-19 pandemic. As a result, it became clear that we had to make an unusually large change in estimate in Q3. Now let me turn to segment performance. In Q3, Personal Systems revenue was $10.4 billion flat year-over-year as supply chain challenges continued to constrain our growth. Demand for our products remains strong with backlog increasing again sequentially, despite substantially clearing the Chromebook backlog. Drilling into the details, Consumer and Commercial revenue was up 3% and down 1% respectively. By product category, revenue was flat for notebooks, up 1% for desktops, and down 9% for workstations. Total units were flat year-over-year. We also drove double-digit growth in both consumer peripherals and services attach across consumer and commercial. Personal Systems delivered $869 million and operating profit and operating margins of 8.4%. The operating margin improved by 2.9 points primarily due to favorable pricing, including the reduction in estimated incentives and currency partially offset by higher costs, including commodity costs, investments in innovation, go-to-market, and variable compensation. In Print, our results reflected a continued focus on execution and the strength of our portfolio. We are uniquely positioned as leaders in both Consumer and Commercial and had the hardware, supply, and services to deliver value in a hybrid world. Q3 total Print revenue was $4.9 billion, up 24% driven by strong growth in supply, hardware, and services. Total hardware units declined 4% due to manufacturing and component constraints, primarily in consumer printers. We expect these Q3 constraints to impact Q4 as well. Our customer segment consumer revenue was up 15% with units down 8% and commercial revenue and units were up 46% and 29%, respectively. Consumer demand remained strong. However, revenue, particularly A4 Laser, was constrained by supply and factory disruptions. The commercial recovery continued with a double-digit hardware revenue growth in office, and triple-digit increases in industrial printing hardware. Given what we're seeing with the Delta variant and evolving hybrid models, we still expect the recovery to be gradual and uneven at times across segments and geographies. Supplies revenue was $3.1 billion. The 20% year-on-year growth was driven by inventory replenishment, stronger commercial demand, and favorable pricing. Our contractual business is a key element of our Print strategy in both consumer and commercial printing. In consumer, our Instant Ink business model continued to resonate well with customers with strong double-digit revenue and subscriber growth. On the commercial side, we drove growth in managed Print Services revenue and total contract value with particular strength in new TCP bookings. Print operating profit increased $377 million to $857 million, and operating margins were 17.6%. Operating margin grew 5.4 points, driven primarily by favorable pricing, including the reduction in estimated incentives, higher volumes in commercial hardware, including graphics and 3D, partially offset by unfavorable mix and higher costs, including commodity costs, investments, innovation, and go-to-market, and variable compensation. Let me now turn to our transformation efforts and our cost savings initiatives. In the second year of our program, we continue to look at new cost savings opportunities and remain ahead of our $1.2 billion gross run rate structural cost reduction plan. Our hybrid work strategy is one example. It has enabled us to accelerate our location strategy while providing a more flexible workspace. Going forward, we are enabling HP's hybrid work strategy by monetizing our sites to be critical hubs for collaboration and innovation. This will also deliver savings to our real estate portfolio. In addition to our progress on our location strategy, we're making progress in our digital transformation. We are enhancing and leveraging our digital capabilities to transform the ways we operate and deliver value to our customers. In the third quarter, we completed the initial deployment of our SAP S/4Hana System, one of the largest ERP implementations. Also, as part of our end-to-end business planning and forecasting efforts, we also went live with our new cloud-based platform, which we believe will improve our forecasting agility as part of our digital transformation. The structural cost savings from those transformation efforts are a key enabler of reinvesting in our business for long-term growth and profitability. Shifting to cash flow and capital allocation, third-quarter cash flow from operations and free cash flow were $1.1 billion and $1 billion respectively. In Q3, the cash conversion cycle was minus 29 days. Sequentially, the cash conversion cycle improved one day as higher days payable outstanding more than offset the increased days of inventory due to growth in inventory across PS and Print and the one-day increase in days sales outstanding. For the quarter, we returned a total of $1.7 billion to shareholders, which represented 178% of free cash flow. This included $1.5 billion in share repurchase and $230 million in cash dividends. Looking forward, we expect to continue to aggressively buy back shares at elevated levels of at least $1.5 billion in Q4. Looking forward to the fourth quarter, we continue to navigate supply availability and logistics constraints, pricing dynamics, and the pace of economic reopening. In particular, keep the following in mind related to our overall financial outlook. For Personal Systems, we continue to see strong demand for our PCs, particularly in Commercial. In Print, we expect solid demand in consumers and a mix shift as Commercial continues to improve. For both Personal Systems and Print, we expect that component shortage, as well as some manufacturing port and transit disruptions, will continue to constrain revenue due to the ongoing pandemic and resurgence driven by the Delta variant. Taking these considerations into account, we are increasing our Q4 and FY'21 EPS. We expect fourth-quarter non-GAAP diluted net earnings per share to be in the range of $0.84 to $0.90 and fourth-quarter GAAP diluted net earnings per share to be in the range of $0.82 to $0.88. We expect full-year non-GAAP diluted net earnings per share to be in the range of $3.69 to $3.75. And FY'21 GAAP diluted net earnings per share to be in the range of $3.56 to $3.62. For FY'21, we expect our free cash flow to be at least $4 billion.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Matt Cabral with Credit Suisse. Please go ahead.

Matt Cabral, Analyst

Yes, thank you very much. I wanted to start off on the PC side. It's a really strong operating margin, especially relative to just how you were talking about that business 90 days ago. It sounds like a lot of that was the reduction in estimated incentives. Curious if there's any way to quantify that impact, and just if there are any other swing factors to call out. And then going forward, just curious for your perspective on the sustainability of margin data above the longer-term range versus the need for some normalization beyond that point.

Marie Myers, CFO

Hey, Matt, good afternoon, and thanks for the opportunity. Why don't I unpack your question? I'll start on the outlook for PS for Q4, and then I'll flip over and give you an update on the change in estimated incentive impact on margin. So, with respect to our PS rate outlook, we have strong confidence in our Q4 operating profit and margin outlook. So far to date, we're really pleased with our PS operating margins to date, and overall, we expect that PS will be well above our long-term range of 3.5% to 5.5% in Q4. So, think about it in terms of being similar to first-half levels, and we'll talk more about that when we get to Sam. Now to address your question with respect to the change in incentive, in terms of the impact on PS margin with respect to OP quarter-on-quarter, the net impact of the reduction in the previously estimated sales and marketing incentive was approximately about a point and a half. And we're talking about that net of investments. And I'll turn it to Enrique now.

Enrique Lores, President and CEO

Thank you, Marie. Let me address your question about sustainability. A very important thing to understand about this quarter is the strength of the demand that we are seeing. Demand continues to be significantly stronger than our supply chain capacity; backlog grew quarter-over-quarter, and this is really driven by the trends that we have been describing before. The hybrid world is opening and driving opportunities for us to continue to sell PCs. There is a very strong demand for PC for people working from home, and we expect that to continue. So, as we saw strong demand in Q3, we expect to see strong demand in Q4 and to continue through 2022.

Matt Cabral, Analyst

Perfect. And then maybe building on that last answer, Enrique, you mentioned confidence in EPS growth next year. I'm sure we'll hear a lot more at Sam, but just curious if you can give us a preview of the biggest drivers underneath there? And just how dependent it is on that sustainability of demand or your revenue trajectory versus maybe other levers you have to pull?

Enrique Lores, President and CEO

So, we continue to see a lot of opportunities across the Company, both in PC, in Printing, and in the new businesses we are creating. As you said, we will be having our Investor Day in a few weeks from now, and we will be setting all the details about next year at that point.

Jim Suva, Analyst

Thank you very much. Can I just ask one question, and that's kind of on the PC side? There's a lot of investor questions about the peaking of the PC cycle and what we're starting to see post the big boost on year-over-year a year ago, big sales. Can you give us some color about your orders, your outlook? It sounds like there is a hand-off going on from consumer to enterprise strength. If I heard you correctly, and therefore probably less strength in Chromebooks. Am I getting that right? And the installed base has been healthily way above 300 million units per year on this run rate. Do you think we're going to stay up there or go down quite a bit? That's the big debate. Thank you so much.

Enrique Lores, President and CEO

Let me try to go one by one. During the quarter, we continued to see very strong demand for PCs driven by the trends that I described. When we finished the quarter, our backlog order that one customer wanted us to ship was significantly larger than what it was at the beginning of the quarter. Both commercial and consumer categories saw an increase in demand. The Chromebook space saw some weakness because many school districts decided to stop their purchase activities until they had clarity on what type of new funds they would be getting from the federal government and the timing of those funds. But this has been clarified, and we expect that demand for the education space on Chromebooks will pick up at the end of this quarter or at the beginning of next quarter. But in any case, there is very strong demand on the PC side, faster growth from the commercial, but very strong growth from the consumer.

Toni Sacconaghi, Analyst

Yes. Thank you. I also wanted to just follow up on PCs. The question is, why do you appear to be facing supply and logistical constraints that are significantly more pronounced than your competitors? Dell just reported PC growth of 27%, yours was 0, Lenovo had very strong growth. HP had been a perennial share gainer, and I think it's lost share in PCs. Three out of the last five quarters, or four out of the last five quarters. Why are these constraints unique to HP? And then related to that, you express confidence in the backlog, but the Chromebook backlog was enormous, 1 or 2 quarters ago, and it's completely gone. What makes the certainty of your conviction in the sustainability of your backlog in PCs for commercial and consumers different from Chromebook?

Enrique Lores, President and CEO

Hi Toni. Let me go one by one. On the PC side, we have areas where we need to improve operationally to better optimize our performance given the delta between supply and demand. We are working on three specific areas. First, we have an outsourced model, where the majority of our production is managed by ODM. This means that those ODMs manage the relationship with the providers of the components that we are missing. We have been thinking about signing direct relationships and direct supply agreements with them to address that gap. Second, an important factor is our PC business portfolio breadth. We lead in both consumer and commercial, but this portfolio has not been designed to optimize for low-cost components, which is what we are currently missing. We are modifying that, and you will see an increase in component leverage across multiple products to optimize our digitalization of components. Third, we are deploying a new ERP system, which is in place. This will allow us to create tools to optimize order allocation based on business priorities and component availability, something we had to do manually until now. When I look at these three areas, I see improvements, and they give us confidence in optimizing how we manage the current situation. Regarding Chromebooks, we closed the backlog because shipments were 100% higher than the shipments made before. The backlog is analyzed customer-by-customer, retailer-by-retailer, which gives us strong confidence in its value and solidity.

Toni Sacconaghi, Analyst

Thank you. Just my final question is, you did say you were going to grow revenues in fiscal '22, you did not say you were going to grow revenues in fiscal '22. Are you confident you will grow revenues in fiscal '22?

Enrique Lores, President and CEO

As I said before, we're going to be having our Investor Day in a few weeks from now, and that will be the right time to have all the conversations about fiscal year '22. Thank you, Toni.

Amit Daryanani, Analyst

Yes. Good afternoon. Thanks for taking my questions. I have two as well. The first one, Enrique, maybe you can talk about the Print business a little bit. It continues to perform really well; I think supplies were up 19%-20%. I think the struggle everyone is having, though, is what does profit normalization look like as supplies growth starts to moderate back to long-term averages? I'd love to understand, do you think there are structural changes in place within supplies that ensure that even if supply starts to slow down, you can sustain the high-teens margins you've been seeing over the last few quarters?

Enrique Lores, President and CEO

Thank you. First of all, in terms of the supply performance, we are really pleased with the performance this quarter. Although we need to accept that the 20% growth is also coming because we had an easy comparison to last year, we are pleased with our supplies performance. We expect to see increased growth in toner as offices reopen, but we anticipate a slowdown in the consumer side, which we were already expecting. In any case, the consumer business continues to be above pre-pandemic projections. Additionally, we have been able to accelerate the transition of our business model, rebalancing profitability while significantly growing our subscription businesses. This gives us strong confidence about the evolution of the business going forward and protecting our supply shares as more customers join subscription programs.

Marie Myers, CFO

To add to Enrique's comments there, our channel is where we want it to be. So, going into Q4, we're not expecting any channel replenishment at this stage either, Amit.

Amit Daryanani, Analyst

Perfect. Thank you very much. And then, Marie, maybe a follow-up with you. On the free cash flow dynamics on your Inventory Day, you talked on that a little bit, a bit of a wide ramped up so much. How do you see that normalizing back into the October quarter? Does it normalize in October? Does it stay elevated, I guess longer-term? And what do you need to see as a Company to take in leverage back up to, I think, two times debt-to-EBITDA that you talked about a year ago or so to exclude the bilateral products?

Marie Myers, CFO

Look, no worries. I mean, I think I got the first part of your question. I'll address your comments on inventory. Quite rightly, inventory is elevated this quarter, and that's really due to strategic assurance of supply. Look, we expect that it's frankly going to remain higher than pre-COVID levels. But we might see some adjustments quarter-on-quarter as we drive and meet customers' needs in a pretty dynamic environment. Now to address the second part of your question on leverage, right now our gross debt to EBITDA is about 1.17, which is below our stated goal of getting towards 1.5 to 2. And we expect to reach that lower end of the range over time. Given our strong earnings and free cash flow performance, it may take a couple of quarters.

Enrique Lores, President and CEO

I think it's important to remember that we are really committed to aggressively returning capital to our shareholders. Our actions during the last quarter reflect that. We have returned $1.7 billion to shareholders, which is 178% of free cash flow, and purchased 20% of our outstanding shares since the value plan started. We are continuing with our buyback strategy, and during the Analyst Day, we will share what our plans for '22 are. You can expect a strong focus on continued buybacks and dividends.

Katy Huberty, Analyst

Yes. Thank you. Marie, can you help us understand what the catalyst was to change the sales and marketing incentives in the quarter because that was a big surprise, and at face value, it almost looks like it was a reaction to operational execution and shortfalls, but maybe that wasn't the case. And specifically, is this an accrual change, or is it an actual change in the level of payments that you were making in the quarter? And should we think about this new level as a new structural level, or will this recover as you come out of COVID? And then I have a follow-up.

Marie Myers, CFO

Good afternoon, Katy. So let me walk you through this change in estimates and then address your specific questions. We typically look at these estimates every quarter. We estimate our sales and marketing incentives based on several factors like historical experience, expected customer behavior, acceptance rates, and a very important driver is market conditions, which have experienced a lot of volatility since the COVID-19 pandemic began. It is also worth noting that some of these programs take several months for partners to claim. With the impact of market dynamics, combined with lower claims from our partners, we had to make this unusually large change in estimate in Q3. We don't expect future changes of this size, but we will disclose appropriate changes if they occur. Regarding reserves, they are liabilities for estimated future payments. A reserve can occur for a variety of reasons, including a change in estimate. In terms of structure, we have a transformation plan in place and are looking for opportunities to drive efficiency in our pricing.

Katy Huberty, Analyst

Thank you for that color. And just as a follow-up, historically, revenue increases 5% to 7% sequentially in October. Is normal seasonality a reasonable expectation given that you're coming from the lower base of revenue in Q3, given some of the execution issues that need to be addressed, or will it take longer to fix, for instance, this shortfall you saw on PCs in international markets and we shouldn't necessarily be assuming normal seasonality? Thank you.

Enrique Lores, President and CEO

Let me take that question, Katy. We need to realize that we are in a very different situation than before the pandemic. Usually, our business is demand-driven, and therefore there is some seasonality. Today, our business is driven by supply. Orders exceed significantly what we can produce. Normal seasonality doesn't apply this year because what we will be shipping will not align with the orders we receive; it will be dictated by the maximum amount of product we can produce.

Shannon Cross, Analyst

Thank you very much. My first question is just with regard to underlying trends in Print volumes. If you can talk about what you're seeing in consumer, small office, and the office. Maybe if you can talk about regions that are either returning to the office or reversing course to get a better idea of your insights based on the data you gather.

Enrique Lores, President and CEO

The trends we are seeing are aligned with the trends we expected a quarter ago. We are starting to see recovery in the office side, but it is uneven and is impacted by the pandemic's evolution, with certain countries seeing offices close again. The trend is positive for office growth, with SMB showing faster recovery than enterprise. On the home side, we see a slowdown due to children returning to school in many countries, but the projections are still above the pre-pandemic estimations. In terms of deviations versus pages printed, the SME goes between minus 15 and 25, depending on the segment, with the enterprise side being lower. We're still below our targets but this gives you some ranges. We expect M&A to be part of our plan. We have a rigorous framework to analyze growth opportunities. This quarter, I closed 2 significant deals: HyperX, enabling growth in peripherals, and Teradici Corporation for services, which allows us to integrate remote compute for complex environments. M&A is part of our strategic plan, and we constantly evaluate new opportunities.

David Vogt, Analyst

Great. Thank you, guys, for squeezing me in. I wanted to go back, Enrique, to the backlog. Can you give us a little more granularity on sort of the mix? I know you mentioned the Chromebook part. Can you give me some insights on the mix? Given where the margin strength came in during the quarter, it sounds a little surprising. Also, it sounds like you think Chromebooks are going to come back into the mix. When you think about the October quarter, should backlog given the supply constraints tick up again, or do you think we're at reasonable equilibrium despite the supply chain constraints from a demand perspective? And then I have a follow-up.

Enrique Lores, President and CEO

The important factor is that our backlog grew during the quarter. We ended with a higher backlog than we started with. The mix is different, with the commercial business accounting for over 60% of the backlog now, where margins are higher. We expect the Chromebook business to accelerate again at the end of Q3 and the beginning of Q4. Chromebook currently represents around 10% of our total PC business, which is relatively small. The strength of the commercial business driven by office investments is essential.

Marie Myers, CFO

In Q4, we expect PS to be well above our long-term range of 3.5% to 5.5%. Chromebooks do dilute margins, and our historical ranges won't necessarily apply due to the current circumstances. We anticipate margins to be strong, mainly due to the commercial segment. For FY'22, I expect continued strength in our margins, but details will be shared at our upcoming meeting.

Ananda Baruah, Analyst

Hey, thanks for taking the question. Take 2, if I could. Enrique, just to the remarks you made a few moments ago: If back-to-office gets meaningfully delayed as we go through the fall here, how should we think about the impact on the PC and the printing business? If demand for back-to-office PCs is put on hold, do you think that could switch back to home demand that would need to be satiated? And I have a follow-up as well. Thanks so much.

Enrique Lores, President and CEO

The backlog we have at the start of the quarter is high. This gives you the magnitude of unfulfilled orders, protecting us from deviations. We do not see a significant implication on our orders from offices reopening or not. More corporations are realizing they need to invest in improving employee experiences, leading to strong demand across the board. Regarding the actions you mentioned about being under-indexed on share: we've been working on improving operational execution through our outsourced model and optimizing performance amid the component shortages. We don't expect drastic increases in capacity, but we anticipate gradual improvements in performance to optimize management in our current situation. We're committed to share repurchases and will announce our plans during the Analyst meeting. Thank you to everyone for participating. We remain very optimistic about the opportunities that the new hybrid world presents for our business. We continue to see strong demand as we navigate supply constraints impacting short-term earnings but not overall growth. We have raised our guidance for Q4 and the year to reflect our confidence in the business. We look forward to seeing you at our Investor Day in October. Thank you.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.