AT&T Cuts the Power at APC

American Power Conversion (APCC Quote) had visions of an APC battery in every home.

As the primary supplier of backup power systems to AT&T's (T Quote) $110 billion broadband cable strategy, APC was hoping to profit nicely from the broadband phenomenon.

AT&T was going to use APC's paperback-book-sized battery packs as a backup power supply as it upgraded its newly acquired cable systems to handle two-way communications.

Then AT&T pulled the plug.

During a routine conference call with analysts Thursday, Leo Hindery, president of AT&T Broadband Services, said that based on trials in Fremont, Calif. -- where AT&T launched a service that simultaneously provides TV programming, high-speed Internet access and phone calls -- the company would switch to network power, similar to the system used by local telephone companies. That little move effectively kills $300 million worth of business to vendors such as American Power Conversion. APC was the sole provider in the trial.

Hindery said AT&T wanted to use the batteries as backup power for communications services so that the company could offer phone service over cable networks. However, consumers were finding the battery systems a nuisance. By ditching the batteries, AT&T will save $100 million overall by having technicians spend less time installing backup systems and responding to battery alarms when the power cord gets disconnected.

News of AT&T's decision somewhat blindsided APC officials, who were scrambling to read the fine print in AT&T's earnings announcement.

On Friday, APC spokeswoman Jodi Kennedy shrugged off the impact of AT&T's move as minimal. "It was a nice extra," she said. "But it's not a major driver of our business at this time."

Shares of American Power fell 1 1/8, or more than 5%, Thursday to close at 20 3/8, on trading of less than 1 million shares. By midmorning Friday, they had recovered 11/16 to 21 1/16.

"It's a very volatile industry -- fortunes can turn on a dime," says Jeffery Kagan, a telecommunications consultant who advises telephone companies.

AT&T's timing could not be more unfortunate for West Kingston, R.I.-based APC, which is billing itself as the industry leader in power protection for cable telephone services.

In a news release issued Wednesday, APC said its PowerShield product, a battery system that provides residential cable customers up to 10 hours of backup power, is "uniquely positioned" to serve "the next generation of home-based network technologies that are expected to include cable telephony, cable modem and digital set-top boxes."

Two analysts who follow APC say they never included sales to cable companies in their revenue projections.

"This is a very new area, and the market is still so small. This shouldn't have a huge impact on them," says Mike Whitney, an analyst with Hartford, Conn.-based Advest. Whitney has a hold rating on APC and does not expect to change it. However, says Whitney, "This may have an impact on what the business could have been a few years out."

Founded in 1981, APC sells a range of power-protection products, from small surge protectors to large-scale battery backup systems for computer networks. Last year, the company recorded $1.1 billion in revenue and had profits of $147.5 million, a 21% increase from 1997.

The AT&T deal was an interesting opportunity for APC, says Bill Becklean, an analyst who follows APC for Sun Trust, a Nashville, Tenn.-based investment bank. "But APC is looking at a dozen opportunities. The future of the company is not pegged to cable." Becklean has a strong buy recommendation on APC, and Sun Trust has done no underwriting for APC.

Earlier this week, APC announced it had cut a small portion of its 5,400 total jobs. The Providence Journal-Bulletin reported 150 employees were laid off. APC officials said there was no connection between the AT&T decision and the job cuts.