Eaton Corporation plc (ETN) Earnings Call Transcript & Summary

Thank you so much, and welcome to the -- to Day 3 of our Industrial Software and Automation Summit. And we have a penultimate presentation now with Eaton. And we are lucky to have Aravind Yarlagadda joining us. He is Executive Vice President and Chief Digital Officer of Eaton. And as we were discussing, I think Eaton has a unique and more holistic approach to digital transformation than some of its peers. And I actually feel like -- frankly, I think if you look at the Analyst Day, I think Eaton presents it in a very unique and holistic way. And frankly, you can see the impact of it in the company's performance. And I am super excited to have Aravind here with us. And the way we'll do it, I think he has an opening statement. And then we're going to go into fireside chat. And to everybody online -- and I see we have a very nice audience, don't be shy. Feel free to ask questions, and I will happily incorporate them into our discourse today. And as I said, look, I just want to thank Eaton for making you available. And I think we have a chance to have a very, very unique event here. So thank you for joining us. And I'll let you sort of make your introduction, and then we're going to go to Q&A. Thanks.

Thank you, Andrew. Thank you for having me over. It's such a pleasure and honor to speak at this conference. So just as an opening message here, as all of you know very well, Eaton is a diversified industrial and components manufacturer and supplier. There's a specific unique approach we are taking with that in mind, right? I mean we want to play to our strengths in understanding our electrical, aerospace, vehicle, equipment, which we do. That domain-specific data that we understand, because we understand our devices as well, and we want to provide unique assets, unique insights through our software and services with those -- with that asset data. At Eaton, digital is more than pure-play software, which we absolutely do. But it's also about using our data or asset data to provide unique value to our customers. It's also about using our internal process data or business process data to better our operational productivity for our corporate and business functions. To that light, actually, we've started about 4 initiatives, one of them primarily with revenue generation using new business models. And the rest of the 3 are customer experience, functional productivity and factory productivity, which we call Industry 4.0 or factory of the future. So this is about using data for internal productivity to reach and serve our customers better and also using data from our assets and devices that we understand really well, provide unique assets through our software applications, which are unique. So we launched Brightlayer last year. Brightlayer is our digital foundation. So to explain it simply, the Brightlayer, as our digital foundation, is a portfolio of services, comprises of digital enablers for our assets, a platform for analytics and insights through our asset data, industry-specific software suites and an experience hub, which actually serves as a marketplace, a digital marketplace where they can -- where customers, partners can actually use our software, buy our software, and also a technology and go-to-market ecosystem building avenue. Brightlayer will be leveraged for digital offerings for our customers as well as internally for our productivity. So that is the message I wanted to convey, Andrew.

Fantastic. So as I said, to our audience, don't be shy. [Operator Instructions] I will happily incorporate them. So yes -- so maybe we can start with the fact that, look, as an electrical equipment manufacturer, you do have a bit different focus. So what portion of Eaton's installed base is connected devices today? Or more generally, is the data for analytics already there? Or do clients need investments in hardware to get the data?

Yes. Great question. I appreciate the question, Andrew. And first, I think we have about like 6 billion plus assets, devices, equipment that's out there, Eaton assets, devices out there, of which about like 25% are connected devices, connected assets. So of these, I think the data is already available. It is about having the relationship and the reach with our customers to actually enable the data. So there's not any significant investment there required to just extract the data out in terms of sensorizing these devices, et cetera. So we use our inferential sensing algorithms, our own inherent inferential sensing algorithms to actually drive these domain-specific insights.

6 million, was that an M? Or billion, was it a B? Sorry.

6 billion, Andrew. 6 billion.

Okay. That's a lot of devices. Okay. So just trying to understand Brightlayer a little bit better. So should we think of Brightlayer as a platform, as software, as sort of a compendium of apps or a set of development tools? What's the best way of sort of to understand what it is?

Thanks, Andrew. Brightlayer is all of the above, actually. I mean, it is -- I mean, if you start from the devices and assets, right, include digital capabilities within the devices like sensing, connectivity, embedded firmware, intelligence, data storage, et cetera. So Brightlayer enables these devices, all these products, hardware products to be more digitally native. The next step in Brightlayer basically is having a platform to actually cloud connect these devices, edge connect these devices, provide the analytic services required for actually mining the data and providing those specific insights. Brightlayer is also a set of industry-specific software, so it's scaled for utilities, for buildings, for data centers, for MOEM, industrial manufacturers. Brightlayer is also an experience hub, where I think you can have a digital marketplace and a partner ecosystem building avenue. Within that platform, you talked about a set of development tools. So Brightlayer does provide APIs, does provide certain configurators for our devices, for managing our devices. So it is a set of development tools as well. So net-net, it is all of the above.

Got you. No. That makes a lot of sense. So how does Brightlayer interact with cloud service providers, third-party analytics companies and other enterprise software? We are seeing other companies make alliances with Microsoft or AWS. What's Eaton's approach? And how do you fit into this world? And how does Brightlayer sort of fit into these developing stacks that -- software stacks that -- I guess people call them hyperscalers have been developing. How should we think about that?

Thanks, Andrew. Here, we follow a customer point of view, Andrew. Smaller customers, they may have lower scale cloud players. Larger customers may have Microsoft Azure as a cloud platform provider. So we start with the approach that we are a cloud-agnostic provider. Our software, our platform, our applications, they are cloud-agnostic. Where possible, where I think we are in charge of the outcome, I think we try and provide Azure and AWS for larger-scale providers, larger-scale customers. Again, we stay agnostic there. We've been not like embedded or vetted with a single cloud platform provider. Also, there's a regional nuance to this, right? I mean, for example, in Asia Pacific, there's Alibaba, Tencent that are cloud providers. So in those cases, I think we do have adapters that plug in to those cloud providers. For analytics, as it relates to applications like third-party applications, we have specific KPIs that can extract data. We have data stores that can actually homogenize the data from different analytics applications and our software applications, Andrew.

Got you. And we do have a question from the audience, and we do have people coming in. So this is a popular session. So that's very good to see. Does Brightlayer require Eaton devices? Or can it pull data from other vendor equipment, assuming many facilities have an array of equipment working together?

Yes. Great question. While it is primarily geared and adapted to Eaton devices and equipment, we do have device drivers and capabilities to extract data and to actually store data from third-party players. For example, building management systems.

Got you. Okay. So Eaton has a number of Brightlayer software suites for different end markets, data centers, utilities, buildings and industrial. So how often are you selling a solution that's new to that customer versus replacing an existing solution?

Again, Great question here. Thinking about this a bit, right, I mean when we talk about change or replacement of a solution that exists there, if the devices are already there and are digitally enabled, I think we'll leave them alone. But from a software standpoint, I think there are 2 things that we provide in addition. One is the data mining, the insights and analytics capabilities, analytics features and functions. And the second is any adapters that are required for plugging into third-party applications. That's the new stuff, if you will, that we'll provide. And if we're selling an entire digital solution, it could be a retrofit to existing deployment. But net-net, the point is with existing deployments where I think there's software already available, we provide analytics features and functions and third-party adapters. In greenfield opportunities, I think we planned an entire digital solution, which includes the, for example, like breakers or meters or chip units or relays plus the platform capabilities on top. So for new greenfield opportunities that are in the platform, it's a value add. The analytics platform is a value add.

And how does Eaton approach putting in solutions on the factory floor? Do you use Eaton staff, partner with a service firm, partner with the customer? What's the -- how does it work, yes?

Good question, Andrew. I mean given that this is an industrial automation summit, I mean I need to highlight that more. We do have factories. We have assembly line factories. We have component factories, et cetera. Majority of them discrete, as you very well know. One approach we take there is we do have certain templates for digital core technologies like cobots or predictive maintenance or -- and data storage, factory automation. We start with a base of factory automation, getting certain fundamental things like OE figured out. And then on top of that, we start adding some of these digital core technologies like cobots, need based, right? So this indigenous thing about just getting the templates established, getting the processes driven, getting the factory automation tools established, that is Eaton doing the work. But if there's any third-party applications that will need to be embedded on the factory floor or included on the factory floor, we take expertise from consulting companies, and that's staff augmentation, if you will.

And just a couple of questions from the audience actually. So one -- let me rephrase it. So it's just the question -- the gist of the question is that there's EcoStruxure. You may be familiar with that or other building equipment providers [indiscernible] MindSphere. What are the advantages of using Brightlayer? And what differentiates Brightlayer from these solutions in your mind?

Yes. Great question again. Yes, I'm familiar with some of the digital platforms, the digital ecosystems and foundations available out there. I think the unique approach that I had outlined earlier, right, I mean we are really focused, razor-sharp focused on the asset data, whether it is our own assets or third-party assets. We don't come at it from a software standpoint. We come at it from a device and device data, asset data standpoint. And we use of proprietary inferential sensing data science algorithms to actually mine the data to provide very specific insights, whether it's a residential home, where I think you need energy management, whether you need appliance maintenance and repair; whether it's a utility requiring like transformers, I mean maintenance of transformers, understanding meter data, providing residential energy usage data to utilities. That fidelity of information that we provide is available through our asset data, and that is our unique differentiator. And that is a value that we actually provide. We are not in the business of force-fitting software applications coming in from others. We want to just take a very deliberate approach coming in from the device level all the way up to industry-specific software applications. So that's the unique value you'll get from Brightlayer.

Got you. And that sort of segues very nicely into my next question. So just given the nature of electrical system and, let's say, data center, it's unlikely that the building is 100% Eaton products. So how have you gone about standardizing the data coming from multiple companies, multiple generations of product, et cetera?

So when you take a look at Brightlayer, right, our current analytics layer, if you take a look at the electrical gear, where you talk about breakers or wiring devices or UPS systems, this is pretty standard, whether it's a factory floor or a facility. However, I think there may be building management systems. I mean there may be other third-party application software or third-party hardware coming in. So our data repository within the analytics layer actually takes that specific data, understands the format. We do have a proprietary data format that we actually use to actually mine the data provided we are in control of the specific data and we are in control of providing insights to the application. So that is how we do it, Andrew.

Got you. And do you need to go more domain-specific with Brightlayer software like taking industrial plants? Do you need a different approach for an auto plant versus a brewing plant versus a refinery? Or are electrical system and needs fairly uniform across use cases?

Good question. As I had outlined earlier, right, the electrical gear is pretty standard in -- across the facilities or factories. As it relates to domain-specific software that you're talking about, the processes and assets on a factory floor are different from the process and assets that are used in building automation versus a data center -- or buildings versus data centers. That is where Brightlayer's industry-specific software comes into play. We do have software suites, Brightlayer for data centers, Brightlayer for industrial manufacturing, Brightlayer for buildings. So our suite approach there at Brightlayer uniquely differentiates us when it comes to domain-specific software.

Got you. And sort of question from the audience. As the connectivity of devices grow and customers demand more analytics solutions, how does the role of distributors change? What steps and investments are you taking to enable distributors to support advanced devices, changing customer needs and Brightlayer adoption?

Excellent question. I mean our distribution channel is the foundation of our success. When you take the Americas business, right, a majority of our business actually comes in from our distribution channels. So they are the foundation of our success. We are -- we have started enrolling them in our journey. When it comes to #1 understanding, we have this concept of digital nativity, Andrew. When I say digital nativity, I mean taking a breaker or taking a UPS system or a variable frequency drive, how do you include sensing capabilities? How do you include connectivity capabilities to the cloud and to the edge? How do you include data storage and embedded intelligence capabilities to our firmware? We are educating our distributors on look, this is part of the stack already in terms of having a digital product out the door. So educating them on what are the features, functionality and unique differentiators of our digital products or digitally-enabled products. And what are the access points to the data, the domain-specific data that you actually get from our devices. So we're educating them on that. We've started the journey. The second is selling Brightlayer software solutions, right -- selling out Brightlayer software solutions. What aspects of Brightlayer can they sell? Ideally, we want them to sell 100% of the software packaged in a certain way. So the answer is yes to everything in terms of the advanced digital capabilities and the devices, the digital products and second is also selling Brightlayer in a very focused and targeted way.

Got you. So next question, there was a pretty impressive stat 2 years ago that 60% of North America utilities use Eaton's grid planning software. So how do you plan to capitalize on some of the niche positions where Eaton has a strong reach and brand presence?

Thanks, Andrew, for the question. There are niche positions, for example, with residential, light commercial buildings, I mean with utilities, an example with our Sign software, right. We do have -- with grid planning and analysis specifically, we have niche positions. In those cases, just to close the loop with some of the data coming in from other devices, third-party systems, we'll take that relationship with the customers that we have, those niche positions and gain access to the data, right? I mean as a trusted partner, as a trusted vendor. And we want to own and just like process that specific data while we'll be stewards in terms of maintaining the environment, maintaining access to the data, et cetera, providing services around the data. Ultimately, the relationship basically is an enabler for access to the data as a trusted partner, as a niche player there. So that is how we want to capitalize on our relationships with our -- with the loyal customers.

So Eaton has a target -- and if I understand correctly, to reach $500 million in stand-alone software revenue by 2025. So what's the philosophy around acquisitions as part of the growth strategy? And what would you be looking for in an acquisition?

Yes. As a diversified industrial, right, I think we've been focused on acquisitions for a lot of time now. Our philosophy remains consistent, right? I mean we want to take a look at software acquisitions in the context of do these companies generate returns, 2% to 3% returns on top of the cost of capital that we deploy. So that is one significant criteria that we look at, and we evaluate these software companies on that angle. The second piece is domain-specific software, whether it is like charge point operators software, right, that we got through Green Motion lately. So it's very domain-specific. That's pretty niche. I mean in terms of a tuck-in, if you will, right? That is how we will evaluate it. If we're trying to get into the battery storage space or battery energy management software space, we will take that link. We will try to enable the domain-specific software with that specific acquisition. So that is our philosophy in terms of how we look at it.

Got you. And can -- just in terms of selling software because -- how do you manage the sales process? Can Eaton use its existing product channels to sell software as well? Or is software going to be a direct sales model?

Great question again, Andrew. And I think I covered this in a previous question too, but I'll say it again. Our channel, our distribution channel is absolutely important to our success. They have been the foundation of our success at least in the Americas. So they will be part of our digital journey. They'll be part of our selling journey. They will be part of our go-to-market access to our end user. So we've started out rolling them. We've started educating them about digital products and the Brightlayer software offerings. And we will leverage them extensively to actually sell Brightlayer software.

Got you. So you are also leading some of Eaton's internal digital initiatives like factory automation. Since this is an industrial automation summit, maybe outline a recent initiative, the biggest challenge during the process and the early outcomes achieved.

Yes. I think the one -- there's been many challenges, Andrew, in terms of just getting some of this established. But good challenges, positive challenges, I should say. So I'd like to highlight our predictive maintenance journey, right, in our factories. While we've established the basic factory automation layer at our electrical industrial factories, moving from isolated machine, personal data to insights and intelligence on the factory is something I want to highlight. This has been a 1-year plus journey. Number one challenge is how do we get the right digital skill sets, right? I mean whether it's IoT connectivity, business intelligence, data science, automation culture, on the factory floor, right? So we've introduced some new roles here, called digital manufacturing engineers, right, who understand their skill, who have the digital mindset. So hiring and training was an absolute priority. Second, I talked about factory automation, so capturing OEE data for overall planned downtime, providing insights. This actually resulted in about like 30% productivity in about like 3 to 4 factories within 8 weeks. So that was pretty significant. And establishing plant-specific KPIs and rolling them up at an enterprise level using Power BI, right? I mean the consistency of the KPIs used across all the factories within a specific region like Americas is an example. We have also sensorized certain plant equipment for temperature, vibration data monitoring. We've introduced a digital diagnostic tool to avoid manual repair intervention, basic but needed. I think given the sensor data thresholds, we want to understand what are those intervals where I think we can deploy personnel proactively, right, instead of preventive maintenance. And then we have our own Brightlayer industrial solution that we're actually using in our factories for predictive maintenance. This is basically analyzing equipment data that's connected to our electrical gear. We use our own inferential sensing algorithms, our own artificial intelligence, machine learning, data science algorithms to do that. So it's been a good journey. I think proud to report that I think we are leveraging our own solutions. We are getting the right skill sets in. We are deploying third-party solutions as needed, but we are getting the productivity. We start small. We commonize, standardize some of these templates and we roll out globally.

Got you. And how are you sort of rolling out -- how are you rolling out internally these products? Do you use a lighthouse approach, i.e., go to your most advanced plants to pilot technologies? Or is it more about finding quick wins at some of the below-average plants? Just what's the operating philosophy here?

So Andrew, to an extent, we use all of them, but let me highlight a few things. With existing plants and factories, right, we follow a consistent model line approach, a model line, model cell approach for factory automation and deploying our digital core technologies like cobots or artificial intelligence and machine learning, augmented reality and virtual reality. So those are the digital core technologies that we try to deploy at our legacy plants and factories within specific assembly lines, if you will. So those are quick wins that we can get. With newer, greenfield factory buildouts and rollouts, we try and establish the criteria from ground zero in terms of what is a lighthouse factory, what are the criteria, right, that we want to showcase and then use that specific factory. Maybe it's a 6-month rollout. Maybe it's a 1-year rollout. But we do highlight that, look, we've implemented 8 of the 10 digital core technologies, if you will. And we show that as a lighthouse. We show that as a showcase.

And as you as you roll out this initiative internally, what kind do you find that you -- as you implement these digital solutions. What do you need to do with your workforce? Do you need to bring in outside expertise? What kind of training do you need to do? Maybe you can just talk about that because what we're hearing is that -- we are sort of hearing that labor and just labor's comfort was operating these new digital tools and ability to implement them is sometimes the gating factor. So how do you think about that?

I think it's a combination of organic skill building where I think we introduced a digital mindset. When we want to build those skills organically, Andrew, we bring in outside expertise to just do some of the gap analysis, let's say, with factory personnel or, let's say, with facility personnel or let's say with our product development sales force or our product management. The biggest consideration that we're giving to is sales transformation. This is where I think we need to bring in skills from the outside. But if it's factories, facilities, data centers, our own IT personnel, supply chain, et cetera, I think we try to build those digital skills indigenously. In the case of data science, in the case of product development people who are -- as an example, right, I mean you want to have DevSecOps as a skill, right, or data science as a skill, we need to bring them in from the outside. Or contemporary user experience techniques, you need to bring them in from the outside. So it's a combination, I would say, Andrew.

And you guys have sort of -- you have provided us with some sort of targets for cost savings. Given what we are seeing, I think it sort of -- you have been highlighting, I think, sort of supply chain pressures, et cetera, et cetera. I think the world is even messier than you guys -- well probably anybody would have thought like 2 months ago. So from that perspective, does this change your view on the timing of pushing these sort of cost savings and efficiency initiatives on the factory floor? The sort of inflation in labor and availability of labor sort of drives rethink in terms of what can be done and what's the scope of potential opportunities down the line. So anything, how is your game plan, right, on your own factory floor impacted by what we are seeing, what we are seeing out there in terms of just labor shortages, supply chain inefficiencies? I'll just leave it at that. I'm sure we can spend a whole evening -- all day talking about that, but maybe give us an answer.

I mean from a factory digitalization standpoint, we started small, but I think in the middle of the year, I think we realized, right? I mean, in terms of there are certain labor shortages. There are certain supply challenges out there. We have accelerated certain efforts on a case-by-case basis, Andrew, with electrical as an example. I think there are certain factories, certain regions that need acceleration. So I would apply broad-brush stroke there. We are taking that seriously. But from a digitalization standpoint, things have accelerated with factory buildouts with some of the labor hiring, training, et cetera.

Your customers, are you seeing sort of a similar willingness from your customers to sort of embrace digital offerings? Has the nature of the dialogue changed over the past several months?

Yes, Andrew. I think the nature of the dialogue is slowly changing. They are seeing the value that we can provide through Brightlayer. They are seeing some of the wins. We are getting certain wins in utilities, in data centers with our new software offerings, with our new platform. So the buyer and the users are asking different questions now. So the game is changing.

Got you. And when you sort of provided The Street with your road map, you definitely sort of highlighted digital customer experience. So what's Eaton's e-commerce mix today? And where do you see it going? And I guess same question for digital marketing, digital marketing dollars versus traditional marketing just maybe because -- it's very interesting. A few companies sort of go into this much detail in terms of trying -- letting us understand their strategy. Yes, just maybe more visibility on how you think about digitizing your customer experience.

Yes. I think the digital customer experience, the real-life examples of that can be provided through a Brightlayer experience hub and through eaton.com and through some of the tools that we're trying to introduce. I mean we're trying to integrate the order management with customers' purchasing tools, right? Our electrical contractors can actually see the status of the order of their equipment, electrical equipment. They can mark up electrical drawings in the future. So those are some sophisticated tools that -- front-end tools, if you will, digital -- front-end digital tools that we're providing to our customers. In terms of the digital marketing trust, in the last 1.5 years, you should have seen, right? I mean there's more digital articles and digital content coming in from Eaton. We are actually portraying this first on eaton.com and then getting to LinkedIn, getting to some of the digital avenues. In terms of the spend, it is tough to quantify, Andrew, but I will say that the thrust, the expenditure when it comes to marketing dollars has -- from a digital standpoint has increased over the last 1.5 years.

And just order of magnitude, how should we think of from the outside, what kind of increase have you seen? Is it like single digits? Or is it quite a bit more material than that?

I think it's double digit. I mean we do have digital marketing departments within the businesses, Andrew. So I think it is double digits, I would say.

Got you. And can you just sort of highlight just a little bit more specific what are some of the early programs that you are doing to improve Eaton's own manufacturing productivity? I know you touched on it, but maybe some more examples.

Yes. I think a few more examples here. One is deployment of cobots in a very selective way, right, making sure that our factory floor -- because third-party underwrite systems come into play, getting a secure and safe factory floor and the right technologies to ensure that. Third is -- we talked about predictive maintenance, but there is also an aspect of -- look, how do you understand yield productivity of a specific machine and the personnel involved. There's a people aspect to it. So we are measuring that too as part of our Factory 4.0 initiative. Most importantly, trying to get the pace of technologies, right, I mean as it relates to manufacturing automation. That's something that we are considering. Other initiatives, it's basically this deployment of these digital core technologies, Andrew, whether it is like augmented reality, virtual reality for training our workforce and deploying that at scale, right, within a specific region, not just within 1 single factory or 2 factories, deployment of cobots, as I had mentioned earlier, deployment of predictive maintenance. Yes, these are some examples that I can provide.

That's great. So Craig Arnold, I think, often cites EV adoption as a big catalyst for Eaton overall. Are there opportunities for software or digital tools that you can layer on to that secular driver? Does -- because you sort of mentioned brand-new factories, brand-new technology, brand-new vertical. Is there anything unique about EVs that would allow you to sort of deploy your digital tools more aggressively?

Yes. Great question, Andrew. I mean we stand by that philosophy every day. Charge point operation software is something that we layer on when it comes to -- and then energy management, building energy management systems in commercial buildings as well as residential buildings. So that's something that we will go forward with. Battery storage technologies, we still need to make forays there, but there's a lot of opportunities there. But building energy management specifically, residential appliance management, maybe in the future, with specific EV penetration, right? I mean how do we partner with utilities? How do we partner with some of these system integrators to actually develop custom services, custom software? So these are some opportunities that we will look at in the context of commercial buildings and residential buildings.

All right. Got you. And what about just the automotive industry -- is the footprint as the new generation of auto manufacturers coming in, do they have a different approach? Because they do get a change -- because a lot of what we're hearing, right, the nature of the change in the industry is sort of limited by the fact that you have assets that are 20, 30 years old and you're just not going to rip and replace, but you sort of have an entire industry creating -- being created from scratch. And we have this new generation of automotive plants, right, that are being built from scratch. Is this industry approaching digital transformation different? Or is it sort of fairly similar to what you would see at legacy players?

Depends by region also, Andrew. I mean with some of the European auto manufacturers, right, we are seeing a fundamental shift there in terms of how they approach digital transformation from ground zero. In the Americas with legacy plants where they're establishing new lines, I think it's more of an evolutionary incremental approach that we see.

And what about new players in the North American market? You see a lot of SPACs, Rivian, Lucid. And I'm not asking you to sort of give specific commentary on a customer, but do you sort of perceive that the manufacturing approach there is different? And do they use your devices in a fundamentally different way? Or is it more of an evolution given that automotive is fairly advanced industry in terms of manufacturing processes?

Yes. I can answer that from my point of view, Andrew, but I think this requires deeper expertise...

Yes, of course.

In that industry. So we can park that, and we can actually take it and get back to you.

No, no. Yes. No. Okay. Got you. So just going back to the software. And folks, if you have questions, absolutely happy to take them. But how are you aligning incentives for distribution channels to sell software? It's a time investment for them, right? So probably somewhat of a different scale. You did highlight that they are a key partner here, but what do you need to do? And what has the experience been in terms of sort of making them push more software through the channel?

Yes. Good question, Andrew. Early in the journey, we haven't gotten to a point of when these are the incentives that we're establishing. We've fundamentally communicated to them that, look, they are an important part of the journey and we are not going to disintermediate. We are absolutely going to enroll them and move forward. We've had a few initial meetings with them where, I think, we're training them on our offerings. We are trying to get to a tiered model in terms of what to sell, right, or something. One tier actually sells digital products, which are hardware, right? Hardware that's digitally enabled. One tier actually sells the entire solution. One tier actually sells software. This is the way we are actually thinking and we're educating our channel. But still early in the journey, more to come.

Got you. And among the end markets, right, where are you seeing early traction? Where do you find the most reception? And I would love to hear your answer because we've heard a very interesting answer from another company. But is it utilities? Is it data center? Is it as industrial buildings? And in terms of competition, where do you guys run into more competition or less competition?

Competition is always there, Andrew, I think, in every segment. But to answer that question very specifically, where do we see more demand, right? In buildings, I mean, in terms of digital content, right, residential buildings, commercial buildings, we see a lot of demand there. Data centers with hyperscales, with distributed IT, we see a lot of demand there in that order, and utilities, obviously, right? I mean utilities are -- I mean there is a next generation of the workforce coming in, there's a next generation of assets and new regulations coming in, in specific regions. So we see a demand there as well.

Yes. I mean one of -- it's interesting. One of the commentaries I heard, and I would love to hear your view is that specific individual I spoke with and he's the CEO of a startup and he commented that they see a correlation with how many PhDs you have in the industry with sort of willingness to embrace more sophisticated solutions. Are you seeing that? Or for your industry, just as I said, you're just so ubiquitous that if you do sort of basic stuff, there is such a huge payoff that we don't even need to get to the sort of next level?

Yes. That's such a unique insight the gentleman provided, right, I mean, in terms of the number of PhDs. The way I would actually extrapolate that is the newer generation workforce that is coming in that understands data, that understands data science techniques, if it's more prevalent at a customer site, whether it's a utility or whether it's the hyperscale or a data center, the more adoption of digital technologies they will have. So I think it has to do with the new generation of the workforce coming in, not necessarily the number of PhDs you have. It's a fundamental understanding of the digital tools and the data that these digital tools provide and the way to integrate the data across enterprise systems and industrial systems.

Got you. So I think what's been interesting about Eaton over the past couple of years, and I think you coming to Eaton frankly, it's quite fascinating to see -- we actually perceive a meaningful transformation over the past couple of years. At least there's more visible stuff from the outside. But there has been an acceleration in Eaton's use of M&A to improve the portfolio. Where do you fit in into sort of the discussions on software acquisitions? And how do you insert yourself into sort of the capital allocation dialogue from your perspective?

Yes. From a software acquisition standpoint, I think we have stated our philosophy, right? I mean we look at some of these software companies that have high valuation multiples. Our core philosophy basically is, I mean, does it generate returns in excess of the 2% to 3% with the cost of capital that we have today? So that is one criteria that we look at. And Andrew, there is a people aspect too, right? I mean we are acquiring the digital talent, the software talent within a software company that we look at. And more importantly, does that software company have that unique domain expertise? It is not just purely digital or platform expertise or software expertise, but do they have the domain expertise to actually sell and to scale, right? So those are some criteria we look at.

And -- but you're part of the discussion.

Yes, yes, yes. Absolutely, yes.

I'm -- as I said, you've outlined multiple layers and multiple levers for digital transformation at Eaton. So what aspect of Eaton digital transformation story do you spend the most time and effort on?

Revenue generation, Andrew, revenue generation through new business models. That is my most important focus, establishing those digital skills, that digital content, right, based on data-oriented services, based on data-oriented, analytics-oriented software and educating our sales force, educating our product managers, educating our internal departments on what is that new offer content that we need to take, what is the philosophy change required, what is the mindset change required. That is a significant amount of time that I spend. Not to say that -- I do spend time on other initiatives as well. Primarily, I mean if you have a lot of costs being incurred in a specific function, how do we take that cost out of continuous improvement techniques while we drive the waste out, automate the process, bring in the right digital tools, that can be deployed at scale, whether it's a function like finance, whether it's a function like supply chain, whether it's a function like human resources. These are some initiatives that I get involved there.

Got you. And I guess just a nice segue into -- will be the last question from me. So how much success are you having on the digital marketplace aspect of Brightlayer? And what are you doing to make Eaton an easier partner go-to-market for third-party developers?

Good question, Andrew. The first version of Brightlayer experience hub, right, I mean the digital marketplace and the ecosystem, that will be early next year. I mean that is what we actually told the market that we will have a version out early next year. However, certain aspects like the front-end digital tools like order center, project center for electrical contractors, they will be embedded as part of eaton.com. We will provide the entry point tour experience up to the marketplace through eaton.com. So that is the approach we are taking. We've had successes with -- in these individual digital tools. We want to provide a framework through an experience to actually integrate these digital tools and provide the entry point through eaton.com. So successes that we had through eaton.com, though these individual digital tools, we want to harmonize and integrate through the experience hub, which is our marketplace and also ecosystem building avenue.

Got you. And I guess I did say last question, but we actually have a question from an investor. And the question is for investors, where is the first area we will all see the impact of digital transformation? Is it on cost out? Is it revenue generation? So yes, what should we look for?

There is an aspect of -- I'll answer the question very briskly, though. There are aspects where you have control of, right? One is, I mean your own internal corporate functions, your business functions, that is where I think you can deploy your tools, you can test your tools. That's where I think you can see a lot of impact provided there's cost to be taken out, provided there's a value play there in terms of just when you automate this process. Revenue generation, where you have a reach into customers and customers are willing to listen and you understand the digital transformation journey, that is also where the maximum impact can be seen, like in buildings or in data centers. So that would be my summation.

Got you. And actually, somebody -- another question, somebody inserted. So look, you came from a competitor not too long ago and very -- a competitor that's perceived to be very successful in -- on digital front. Now that you have been 1.5 years at Eaton, what's different about Eaton's approach to digital transformation?

Great question. I mean we fundamentally start from a device level, right? I mean our approach is more grounded towards we being a component supplier and a component manufacturer. We derive our strength in our installed base from our devices, our equipment, whether there's meters, variable frequency drives, breaker or UPS systems or wiring devices or equipment for harsh and hazardous environments. We want to build on that foundation rather than come at from above. So that's a different approach we are seeing. We understand the data that comes in from our devices. We understand what analytics to provide. We understand the linkage between those specific insights and the operations that our customers have in factories, data centers or places. So we want to take it from bottom up, not top down.

We're actually coming on time. This has been incredibly informative, and thank you so much for opening up and talking to us about Eaton's strategy. And I think all of us have learned a ton during this presentation. So thank you so much for making us available. Thank you for giving us such a wealth of information. And I look forward to when we can do this in person. And thank you all for joining us. And as I said, we have one more session left with ARC Advisers, and then we're going to be done. Thank you.

Thank you, Andrew and team, for having me over.

Thanks so much.