Q3 2021 HP Inc Earnings Call
By 31, 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.
<unk> 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.
Thanks, Bruce good after.
Good morning, everyone and thank you for joining the call.
Okay.
You and your families are safe and well.
It's an important thing for us to connect with her.
We're taking shape, he's expanding our addressable market and creating new opportunities to drive profitable growth.
We have already started to capitalize from these on behalf.
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 those.
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.
Person to one $2 billion.
Non-GAAP EPS increased to $1 compared to 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.
And trends in our segments.
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 product as we can while navigating a complex operational environment.
We are managing through component shortages Covid related factory Lockdown in southeast Asia, and congested ports some transportation disruption.
Even under these conditions, we delivered solid financial results.
And third we are performing and growing transforming our business.
This model from service offerings to capitalize on emerging growth opportunities.
We have continued to make progress, reducing our fixed cost structure evolving our business models 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 this will be driven by our focus on peripheral a new computer modeling in.
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.
P C penetration rates are growing across our markets as devices become increasingly essential in today's hybrid world.
While we.
We delivered strong operating profit peers revenue was less than we expected primarily because of our supply chain constraints.
We expect industry wide supply shortages, particularly in IC to continue into 2022.
Even.
These we have identified the necessary improvements, we need to make and are accelerating their execution to drive stronger top line performance.
We expect that it will take more than one quarter to show results.
But supply our peers portfolio.
<unk> is extremely well positioned for the hybrid world and we see significant opportunities for market expansion.
Our leading share in commercial Pcs positions as well as more businesses reopen.
In the commercial market, we launched a new all in one and expanded.
Our zebu portfolio of high performance Pcs for creative professionals.
This includes there's ebooks to D O G. Eight the worlds most powerful mobile workstation of each site.
And our new CPU power, bringing zebu performance two students SMB.
And the public sector.
In Q3, we also launched a new pavilion lineup that brings premium computing experiences into the mainstream.
We rolled out a series of new displays that are purpose built for home office and entertainment setups.
And we continued to drive momentum outside of our core hardware business.
This quarter, we completed our acquisition of high Parex, giving us a leading position in gaming peripheral 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.
And we are investing to meet emerging customers meet in the commercial space.
This is highlighted by our recent agreement to acquire <unk> Corporation.
D. G software is widely used by leading organizations around the world to deliver superior remote computing solutions.
We expect this deal will accelerate new compute models and services tailored for hybrid work environment.
In printing revenue was.
Up 24% driven by a recovery in commercial and strength in consumer.
As in personal systems, the rise or fall in hybrid play Star Wars things and is creating new opportunities for print innovation and growth.
Specifically, we are expanding.
In our services and subscription offerings, each of which delivered double digit growth this quarter.
We continued to scale HP, plus an instant ink across North America and Europe.
<unk>. The addition of HP plus on the ANV and they ship product primarily.
We.
We have seen positive response to HP, plus a date and hp's instant ink hit a major milestone by surpassing 10 million subscribers.
Our subscription services by providing a simple and seamless experience for today's hybrid workers paving the way for new offerings in the future.
We also continued to evolve our hardware portfolio with success in our award winning H P laser get 930.
HP continues to be recognized as a best managed print vendor, helping F&B solution providers thrive in a competitive market.
For 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.
Important.
Fortunately our number of pages printed is at or above 2019 <unk> 11th.
We once again saw double digit growth in print impressions and square meters as well as strength in key categories like labels and packaging.
And in three D.
We remain focused on driving high value end to end applications in strategic vertical markets.
This quarter, we launched the new alright perfect solution.
It liberated H P C. The printing and cloud based software to help the millions of <unk>.
We will suffer from foods pain.
It is a great example of the opportunity we see to disrupt industries with highly personalized solutions.
Our combination of innovation and execution enables us to continue making progress across our business and portfolio.
Patients 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 investment.
In Q3, we returned one 7 billion.
Julien to shareholders and have returned $6.8 billion over the past 12 months.
We believe our shares remain in the value and are committed to aggressive repurchase levels of at least one $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.
Hi, Perry, Ontario D. T 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.
How do 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 highlight.
The work we are doing in climate action human rights and digital equity and outlined new 2013 codes.
Not only is this the right thing to do it's also driving business success.
In 2020, our sustainable impact initiatives help us win more than 1 billion.
In your sales for the second consecutive year.
Along with this we recently issued $1 billion in sustainability bonds.
We're allocating these proceeds to ESG related initiatives consistent with our strategy and values.
Looking.
Billy onto Q4, our backlog remains significantly elevated we expect robust demand to continue and we are taking decisive steps to address operational headwind.
Our portfolio is strong and resilient and we remain on track to significantly exceed.
I said at the full year EPS target we set in February.
And today, we are raising our Q4 outlook.
But more importantly, we plan to build on this performance and expect to grow full year EPS in fiscal year 'twenty two.
So longer term the hybrid world plays to our strengths and create attractive opportunities across our categories.
We are well position to drive sustained performance that we innovate improve and continue to reinvent for our customers partners and shareholders.
Hi.
I look forward over the coming October analyst meeting to discuss our strategy and our plans to drive continued business success.
Let me now turn the call over to Murray, who will take you through the details of the quarter and our fiscal year outlook Murray over to you.
Thanks, Enrique looking at our third quarter financial results, we delivered another solid quarter of revenue growth.
Operating profit and EPS growing substantially faster.
We are continuing our transformation journey, while generating strong free cash flow returning signature.
Significant capital to shareholders.
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.
Car T Americas increased 12% EMEA increased 1% and a P J declined 6%.
Supply chain constraints affected both print and personal systems revenue.
And this was particularly impactful in EMEA and a P J and personal systems.
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 five five points year on year.
The increase was primarily driven.
A continued favorable pricing, including lower promotions as well as a reduction to previously estimated sales and marketing programs incentives as well as currency, partially offset by higher costs.
Non-GAAP operating expenses were $1.9 billion.
And by 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.
GAAP net OID expense with $78 million for the quarter.
Non-GAAP diluted net earnings per share increased 51 cents to one dollar, including 25 cents related to the reduction in previously estimated incentives of which 12 were reinvested during the quarter.
Primarily in accelerating R&D incremental marketing and our hybrid work strategy.
Non-GAAP diluted net earnings per share excludes net expense totaling $19 million primarily related to <unk>.
Restructuring and other charges amortization of intangibles.
<unk> 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 with 92 cents.
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 policy, we would do these estimates every quarter.
We estimate incentives based on a number of factors like historical experienced customer behavior and market conditions.
The change in estimate as 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.
For our products remains strong with backlog, increasing again sequentially despite sustained.
Abstention clearing the crane backlog.
Drilling into the detailed consumer and commercial revenue was up 3% and 1% respectively.
By product category revenue was flat for notebooks up 1% for desktop and down 9% for workstations.
<unk> 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 eight 4%.
The operating margin improved two nine points, primarily due to favorable pricing, including the reduction in estimated incentive.
Currency, partially offset by higher costs, including commodity cost investments and innovation.
The basin and go to market and variable compensation.
In print our results reflected continued focus on execution and the strength of our portfolio.
We are uniquely positioned as leaders in both consumer and commercial I'd have the hardware supplies and services.
To deliver value in a hybrid world.
Q3, total print revenue was $4.9 billion up 24% driven by strong growth in supplies.
Hardware and services.
<unk> hardware units declined 4% due to manufacturing and component.
Constraints, primarily in consumer printers.
We expect these Q3 constraints to impact Q4 as well.
By customer segment consumer revenue was up 15% with units down, 8% and commercial revenue and units were up 46% and 29% risk.
Especially.
Consumer demand remains strong however, revenue, particularly a four laser with constrained by supply and factory disruptions.
The commercial recovery continued with double digit hardware revenue growth in the office and triple digit increases in industrial printing hardware.
Given.
What we're seeing with the delta varied and evolving hybrid models, we still expect the recovery to be gradual and uneven.
Times across segments and geographies.
Revenue was 3.1 billion doses the.
The 20% year on year growth was driven by inventory replenishment.
Given drove the commercial demand and favorable pricing.
Our contractual business is a key element of our print strategy in both consumer and commercial printing and consumer our instant ink business model continue 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 U T C. P bookings.
Print operating profit increased $377 million to $857 million and operating.
<unk> margins were 17, 6%.
Operating margin grew five four points, driven primarily by favorable pricing, including the reduction in estimated incentive higher volumes in commercial hardware, including graphics and three D, partially offset by unfavorable.
Mix and higher costs, including commodity costs investments in 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.
New cost savings opportunities and were made 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.
<unk>, we are enabling H p's hybrid work strategy by monetizing our sites to be critical hubs for collaboration and innovation. This will also deliver savings and our real estate portfolio.
In addition to our progress in our location strategy, we are making progress in our digital transformation.
The nation.
We are enhancing and leveraging our digital capabilities to transform the way, we operate and deliver value to our customers in the third quarter. We completed the initial deployment of a S. A P. S. Four on our system one of the largest ERP implementations.
Also as part.
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 for that 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 -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 P. S and print and the one day increase.
<unk> and 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 recovery.
Yes.
In particular keep the following in mind related to our overall financial outlook.
But personal systems, we continued to see strong demand for our P CS, particularly in commercial.
In print, we expect solid demand in consumer and a mix shift as commercial continues to improve.
We are a people both personal systems and print we expect the component shortages 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.
<unk> into account, we are increasing our Q4 and FY 'twenty one E. P S.
We expect fourth quarter non-GAAP diluted net earnings per share to be in the range of 84 to 90 cents.
Fourth quarter GAAP diluted net earnings per share.
Yet to be in the range of 82 to 88 cents.
We expect full year non-GAAP diluted net earnings per share to be in the range of $3.69 to $3.75 and FY 'twenty, one GAAP diluted net earnings per share to.
In the range of $3.56 to $3.62 for FY 'twenty, one we expect our free cash flow to be at least $4 billion.
And now.
I would like to hand, it back to the operator and open the call for your.
No questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first.
First question comes from Matt Cabral with Credit Suisse. Please go ahead.
Yeah. Thank you very much.
Wanted to start off on the PC side, so really strong operating margins, 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 incentive curious if theres any way to quantify that impact.
And just if there's any other swing factors to call out.
Then going forward just curious for your perspective on the sustainability of margins at or above the longer term range versus the need for some normalization beyond that point.
Hey, Matt good afternoon, and thanks for the opportunity so why don't I hit.
Unpack your question I'll start on the outlook for P. S 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 P. S rate outlook. You know look we have strong confidence in our Q4 operating profit and margin outlook.
So far to date, we're really pleased with our peers operating margins to date and overall, we expect that P. S will be well above our long term range of three and a half to five and a half does that in Q4, So think about it in terms of being similar to half one levels and you know, we'll talk more about that when we get to them.
Now to address your question with respect to the the change in incentive in terms of the impact on P. S margin with respect to O P quarter on quarter. The net impact of the reduction in the previously estimated sales and marketing centered was approximately about a point and a half and we're talking about that net of investments.
No no. Thank you Barry.
Christian about sustainability I think 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 in driving opportunities for us to continue to.
The emphasis there is a very strong demand for Pcs for people working from home and we expect that to continue so as we saw strong demand in Q4 and Q.
Three we expect to see is going to be mining in Q4 and to continue through 2022.
Perfect and then maybe building on that last answer Enrique you mentioned covenants and EPS growth next year I'm sure, we'll hear a lot more at Sam.
If you could 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 do you have to Paul.
So we continue to see a lot of opportunities across the company both in Pcs and print thing in the new businesses, we are creating and as you said, we will be having our investor day in a.
A few weeks from now I would be sitting on the details how about next year at that point.
Our next question is from Jim Suva with Citi. Please go ahead.
Thank you very much can I just ask one question and that is kind of on the PC side.
There's a lot of investor questions about.
The peaking the PC cycle and what we're starting to see post the big boost.
On a year over year.
So big sales can you give us some color about your your orders your outlook. It sounds like there's a handoff going on from consumer to enterprise strength, if I heard.
Heard you correctly, and therefore, probably less strength in chromebooks.
Am I getting that right and you know that.
Installed base has been you know.
Hopefully way above 300 million units per year kind of on this run rate do you think we're going to stay up there or go down quite a bit that's kind of the big debate. Thank you. So.
So let me let me try to go one by one so first of all I was mentioning before during the quarter. We continued to see very strong demand for P. C. Viva by driven by the trends that I described.
What we saw was that when we finished the quarter our backlog.
That we had that one.
Customers wanted us to ship was significantly larger than what it was at the beginning of the quarter.
And what we saw is very strong demand on both commercial and consumer categories. In both cases, we saw increase of demand.
The area you were mentioning where do we saw some weakness worse on the chromebook.
So much hate because many and it was mostly in the U S. Because many school districts decided to stop their purchase activity until they have clarity on what type of new funds. They were gonna be getting from the federal government and the timing of Roseland I know this has been clarified we expect right now.
Demand during 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 very strong demand on the PC side.
Plus the growth from the commercial but very strong growth from consumer.
The next question is from Tony second half.
Books Bernstein. Please go ahead.
Yes. Thank you.
So wanted to just follow up on on Pcs.
What's the question being why did why do you appear to be facing supply and logistics constraints that are significant.
Huggy Woodley.
A more pronounced than your competitors still just reported PC growth of 27% Euro Swiss zero Lenovo had very strong growth.
H b being a perennial share gainer and I think as loss share mpc's three out of the last five quarters or for the last five quarters.
Okay.
Why are these constraints so unique to H P.
And then related to that you expressed confidence in the backlog.
But the chromebook backlog was enormous one or two quarters ago, and it's completely gone and so.
So what what makes the certainty of your conviction in the sustainability of your backlog in Pcs.
For commercial and consumer different from Chromebook.
Sure. So hi, Danielle let me let me go one by one.
On the PC side, what we saw.
We clearly have some areas, where we need to improve operationally to be able to optimize our performance given the delta between supply and demand and there are three areas, where specifically we need to we are working on we need to do some more work.
As you know we have an outsourced model.
With the majority of our Oh, how our production is managed by Odeon. These means that total Dms, we're managing done till now the relationship with the provider. So if a component that we are missing we've kind of been thinking that signing now direct relationships and direct supply agreements with them. So this is.
Addressing that gap.
Second important factor is one of the key things of our PC business is the breadth of our portfolio, we need both in consumer and commercial but this portfolio has not been designed to optimize for low cost component, which is what we're missing now we have been changing that and.
Well, if you will and we will introduce our new products going forward you will see an increase of leverage of components across multiple products. So we can really optimize our utilization of components and third as we mentioned in the prepared remark we have been working to deploy.
Our new ERP system that the ERP system is now in place and now we have the ability to create tools that will help us to optimize.
The allocation of order not only based on business priorities, but also on component availability and this is something that until now because we were in.
The median of the ERP change we had to do manually. So when I look at all these three areas explain kind of the improvements that you're going to see on the site and give us confidence how we will continue to optimize our how we manage the current situation.
Then the second part of your question around Chromebooks.
I think that an important factor to realize is that during the quarter. We closed the backlog because the shipments of chromebooks, where 100% higher than shipments that we made before when we look at the backlog that is left we analyze it customer by customer retailer by retailer partner by partner in this.
This gives us very strong confidence in the value and the solidity of that backlog. He will look at cancellations with exception of chromebook coming from some of the changes in the U S. Because we think we are not seeing cancellations in the backlog and as we mentioned before it is more than one quarter.
Of demand what we have in backlog.
Thank you just my final question is you, but you did say you were going to grow revenues in fiscal 'twenty. Two you did not say, we're going to grow revenues in fiscal 'twenty two.
Are you confident you won't grow revenues in fiscal 'twenty two.
Yes.
I said before we ever going to be having our investor day in a few weeks from now on we will that will be the right time to have all the conversation about fiscal year 'twenty two thank you Tony.
The next question is from Amit <unk> with Evercore. Please go ahead.
Yes. Good afternoon, thanks for taking my questions.
There's a lot I guess the first one and we can maybe you could talk about the <unk> business a little bit it continues to perform really well looking supplies was up 19% 20%.
I think the struggle at what ends up happening having noise, what does profit normalization looked like at supplies growth starts to moderate back to the long term averages.
You understand do you think there are.
Structural changes in place within suppliers within print actually that ensure that even if supply starts to slow down you can sustain the high teen margins that you've been seeing over the last few quarters.
Thank you. So first of all in terms of the supplies performance. We're really pleased with the performance that we saw this quarter, though we need to.
To accept that the 20% growth is also coming because we had an easy compare to pull out here, but again, we are pleased with the performance of our supply in terms of where do we see happening basically.
The trends that we shared before as offices are reopening we are starting.
We're going to see an increase in growth on the Turner side on the office side and at the same time, we are starting to see sunlight a slowdown on the consumer side, which again is what we were expecting and in any case the consumer business today continues to be above the projections had we had for.
At this time.
Before the pandemic started and this is a structural change that has happened.
Recently, two that we have been able to accelerate the transition of our business model, both rebalancing profitability, but also significantly growing our subscription businesses and this gives us strong confidence.
And how about the evolution of the business going forward, but also in terms of protecting our supply share speak with her more and more customers are part of the subscription program.
Make sure that they continue to use HP supplies.
Yeah.
His comments perfect right now our channel is where we want it to.
These had going into Q4, we're not expecting any channel replenishment at this stage either on it.
Perfect. Thank you very much and then maybe a follow up with you.
On the free cash flow dynamics and your inventory days, you talk to that a little bit.
The white ramped up so much.
How do you see that normalizing back into the October quarter does normally.
Where does it stay elevated I guess longer term and what do you need to see as a company to take leverage back up to I think two times debt to EBITDA is what you talked about a year ago or so.
The buybacks are in Florida.
Yeah, No worries I mean, and I think I got the first part of your question I'll I'll address your comment on.
Inventory and quite rightly. So you you said that the inventory is elevated this quarter and that's really due to strategic assurance of supply look we expect that it is frankly going to remain higher than pre COVID-19 levels, but you know look we might see some adjustments quarter on quarter.
We drive that.
And meet customers' needs you know, we're in a pretty dynamic environment as we speak here now to address the second part of your question on Unlevered <unk> right now our gross debt to EBITDA was about 1.17, which is you know its blow out a stated goal of getting towards one five to two and look we continue.
You know.
We expect to reach that lower end of the range over time, but right now given out our strong earnings and free cash flow performance.
It's got to be a couple of quarters, but I might just add that you know we are really proud of the job that we've done around capital allocation I think you heard in my prepared remarks.
So you know we plan to purchase back at least $1.5 billion in shares in the quarter and we cannot just turn it over to you for any closing comments, maybe a couple of comments I think it is important to remember that we are really and we stay very committed to aggressively return capital to our shareholders and our actions during the last quarters.
This reflects that but we mentioned we have returned this quarter, one $7 billion to shareholders, which is 178% of free cash flow and the value plan started we have return we have bought 20% of our outstanding shares. So a really strong commitment to that we did in Q4.
We are going to be buying at least one $5 billion. So we are continuing with that and during the analyst day, we will share with our plans for 'twenty. Two are but you can expect from us very strong focus on continue buying back and dividends.
The next question is from Katy Huberty with Morgan Stanley.
Please go ahead.
Yes. Thank you Murray can you help us understand what the catalyst was to change the sales and marketing incentives and 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 an actual change in the level of payments that you were making in the in the quarter and should we think about this new level as a new a new structural level or will will this recover as you come out of Covid and then I have a follow up.
Stanley.
And good afternoon, Katie So why don't I I explained to you.
This will be true this change in estimate then I'll address your question specifically around.
The accrual on the reserves. So we typically look at these estimates every quarter. So we estimate that our sales and marketing.
Getting incentives.
Just on a number of different factors. So for example, historical experience expected customer behavior acceptance rates and a very important driver is market conditions, which as you know we've experienced a lot of volatility since the COVID-19.
<unk> pandemic began.
It's also worth noting that that some of these programs take several months from six to 12 months for the partners to claim.
With the impact of these market dynamics combined with the lower claims that we've seen from our partners. It became clear that we had to make this.
Unusually large change in estimate in Q3, and frankly, we don't expect future changes of this size, but if it changes we'll make the appropriate disclosures now.
Typically reserves just to answer your question you asked me about our you know the reserve and then I'll address your structural components.
Reserves are typically liabilities for estimated future payments are.
Our reserve can occur for a variety of reasons one of those can actually be a change in estimate.
And in terms of structural as you know we have in place that transformation plan, we are expecting to be at 75% about one point to $2 billion.
And you know, we're always looking for opportunities to drive efficiency in our pricing and we've been very effective actually in pricing for the current market environment as you see in the results that we've delivered so certainly in terms of structural we're looking for opportunities to continually improve our pricing and our ability to price.
Predictably in this dynamic period.
Thank you for that color and just as a follow up historically revenue increases 5% to 7% sequentially and in October is normal seasonality, a reasonable expectation given that you're coming from Dell.
Price of our base of revenue and in three Q given some of the the the execution issues that need to be addressed or will it take longer.
To fix for instance, the shortfall you saw in Pcs and in international markets, and we shouldn't necessarily be assuming normal seasonality. Thank you.
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, whose demand driven and therefore, there is some seasonality driven by buying patterns through.
Today, our business is totally driven by suppliers.
He said before or the exit significantly.
What we can produce and therefore normal seasonality the same apply to a year like this because what we will be shipping is not what we would be getting out of those four is gonna be worth is a maximum amount of product that we can produce every day every week every month.
If you go onto the next question is from Shannon Cross with Cross Research. Please go ahead.
Thank you very much. My first question is just with regard to underlining underlying trends in print volumes and if you can talk about what you're seeing you know consumer Soho and the office and maybe if you can talk about you know within regions.
Regions that are either I guess, returning to the office or reversing course, just to get some idea of what you're seeing with the data that you get thank you.
Thank you Shannon.
Third we are seeing are aligned to the trends that we were expecting to see a quarter ago, we're starting to see recovery.
In the office right now I have two.
Say that that recovery is uneven and it is impacted by the evolution of the pandemic on certain countries. When theyre headed we still we feel because of growth again, and then we see an impact there, but the trend is positive in terms of office growth.
We see.
Third row from the F&B side than on the enterprise side, when I say growth I mean recovery on the other side on the home side again, we would expect them, we're starting to see a slowdown.
Kids are starting to go back to the two schools in many countries and the violence of award between hormonal offices.
Changing the game is what we were expecting and in any case, what we see today in the projections that we have now continue to be both the projections that we have before the pandemic.
And as a clarification can you say you know you're at 80% or 85% of where you were printing and then my.
Also the Jeopardy, and my second question is with regards to acquisition.
You know, especially if youre going to start to see some revenue pressure next year given some of the strength you've seen in Pcs. This year, where where are you at with regard to acquisitions. Thank you.
In terms of deviation, where food number of pages printed I gave you a question.
Just somebody else's. It goes between -15, and -25 or -20, something between SMB and enterprise. So we are seeing we know what we went through where we went to be but this should give you some ranges.
And then in terms of acquisition weak M&A continues to be part.
Any forward plan, we probably are.
Rigorous framework to analyze the opportunities that we see based on returns based on alignment on strategy based on our ability to execute.
We are constantly evaluating opportunities in our core businesses and adjacencies to support our.
Part of our growth strategies and this quarter, we had two great. Examples that show how do we approach and how do we think about M&A. We closed the hybrid X deal that is really allowing us to accelerate our growth into the peripheral space and now we have a leading position in peripheral.
New gaming and we did also a very exciting opportunity on the services space with the acquisition of <unk> Corporation that will allow us to integrate into our services remote compute for highly complex environment, which many of our customers are utilizing today. So.
As for M&A is part of our plan and we are executing on that when we see the right opportunity.
The next question is from David vote with UBS. Please go ahead.
Great. Thank you guys for squeezing me in so just I just wanted to go back and regain the backlog can you give us a little bit more granularity on sort of the mix I know you mentioned.
The chromebook part of the backlog had come down pretty dramatically, but any more color on what that mix might look like.
Given where the margin strength came in in the quarter. So that's a little bit surprising and then you know obviously it sounds like you think chromebooks are going come back a little bit.
Into the mix, how do you think about sort of order growth from a chromebook perspective relative to where.
Mentioned that's.
Where the backlog is today, so what I mean by that is so when you think about the October quarter should backlog given the supply constraints tick up again, given your commentary or do you think with reasonable equilibrium. Despite the supply chain the supply chain constraints from a demand perspective, and then I have a follow up.
Sure let me.
Let me address some of your points so first of all.
First important factories backlog grew during the quarter. So we ended the quarter with her.
Higher backlog than what we had when the quarter started well.
The mix of the backlog or a different as I said before we basically fulfill all the orders.
Or do we had with chromebooks, but the rest of the controversial business and consumer grew significantly and today when we closed the quarter more than 60% of the backlog, what's coming from commercial customers, which is where margin her hunger and where we and this is.
An important factor too to have in mind.
Look at the future, we expect the chromebook business to accelerate again at the end of Q3 and at the end of Q4, but I think it's important to have in mind that chromebook represents around 10% of our total PC business, even slightly below that.
Really a relatively small business for us what they really want to highlight is the strength of our commercial business, which really is driven by company reopening offices being reopened on investments at corporation are doing and Smbs are doing it in improving their work and experience for their employees.
And then that's helpful. I appreciate that and maybe just a follow up for Maria along those lines. So I know you mentioned Q4 margins will be more likely.
Resembling kind of one half margins in personal systems group.
Is that the right way to think about it in terms of commercial margins are above where we are now in chromebooks as it comes back into the mix into.
Four is slightly dilutive to margins.
That's how we think about sort of that step down from <unk> into <unk> and then into 2022, if enterprise or commercial is still relatively strong.
Should we be expecting margins in PSG to be above sort of your normal historical three and half to five 5% range.
Yes.
Q going into Q4 as I mentioned earlier, we expect P S to be well above our long term range of three and a half to five and a half. So just think about it in terms of being similar to the sort of half one levels and to your comment about crime, yes crush margins are usually more dilutive to P. S.
Now in terms of 'twenty, two and how to think about 'twenty two margins, we're going to talk more about that in terms of the mid and long term at our security analyst meeting in October. So we'll look forward to seeing you then.
And our last question today is from Ananda Baruah with loop capital. Please go ahead.
Hey, Thanks, guys for taking the question.
Two if I could.
Okay.
The remark you made a few moments ago.
Back to office get meaningfully delayed as we go through the fall here like how how should we think about you know the impact.
Intact.
The PC in the printing business.
And in that you know if if if if the demand for back office P. C is put on hold to any extent do you think that there could be a switch back.
Is there is sort of PC demand still at the helm.
Pack that would need to be satiated, and they added follow up as well. Thanks so much.
I think the the backlog that we have when the Cortez therapy. So high when I say backlog is close to one full quarter. This gives you the magnitude of the order that we are not able to fulfill I think in the short term.
So really we are very protected from any deviations versus their current plans. So I don't think this will have any big impact from that perspective, and under and what we're seeing is especially on the PC side, we have not seen a big implication of their officers reopening or not because more corporations realize that they need to invest.
In improving the experience for their employees and we are seeing very strong demand across the board.
That's that's really helpful. And then I guess the second one is the actions that you described and we gave with regard to.
And sort of the underutilized so did that.
The comments about being under indexed on chair you know and you had talked about you know sort of execution dynamics outsourced model components being optimized across Skus ERP system. When when do you believe that those actions collectively can start to make an impact that will show up in the P&L.
And I'm, assuming that also you were suggesting that it would be share repurchases as well.
Well I think in terms of the actions we have been working on them for for a couple of quarters now and they will have impact gradually during the next months.
This is really more about how do we.
Most of our performance within the current constraint environment.
We didn't expect that with these we're gonna be able to double our capacity because there are significant shortages of components, but it will have a gradual improvement in our performance, especially when we look at it competitively.
I'm not sure if I understand.
Of your comment about share repurchase we are fully committed to continue to repurchase stock. We announce that we did in Q4, we will be bringing at least one $5 billion for sure.
At the analyst meeting, we will share what are the plans for 2022.
Thank you.
And I think that that was the last question. So let me close by saying. Thank you everybody for participating as you have seen during the call. We remain very optimistic about the opportunities or the new way of working that the hybrid world is opening for us and we are making very good progress executing our.
And urology, we continue to see very strong demand.
And in the short term our results are going to be impacted by component availability is not a demand driven world. It's a supply driven world in these world our ability to drive financial results is very strong we have confidence in.
Our third and this is why we raised the guidance for the year and for Q4 to reflect the confidence we have in the business.
And as we said we're looking forward to see all of you in our Investor day in October. Thank you.
The conference has now concluded thank you for attending today's presentation.
In the few now disconnect.