When you reach your configured backup retention limit (configured in step 3 of the “New Backup Job” wizard), your two oldest backups are consolidated (combined) when backing up a vSphere Virtual Machine, however, if you’re backing up a physical system using CBMR the oldest backup is removed.
This means that if you had an incremental backup schedule configured to run daily with a backup retention of 3, on day 4 (once the retention limit was hit) your backup taken on day 2 would be combined with the initial backup taken on day 1 for vSphere VMs, or for Physical the backup taken on day 1 would be removed, resulting in 3 backups.