Thus stung by 21% markdown in shares

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The Independent Online

Thus, the telecoms group spun out of Scottish Power, was left stunned yesterday by a 21 per cent slump in its share price after the company's trading update at its annual meeting.

Thus, the telecoms group spun out of Scottish Power, was left stunned yesterday by a 21 per cent slump in its share price after the company's trading update at its annual meeting.

Thus reported strong revenue growth and cash flow for the first quarter but said selling more high-speed internet and telephone services to BT's rivals had reduced gross margins.

Bill Allan, the chief executive, said the market's reaction was "bizarre" when the core business had performed well. Thus also announced it had sold off a non-core, call-handling business for £4m and that it was reviewing the future of an interactive technology operation, another non-core business.

However, the company said it was "cautious" about the general economic outlook and the telecoms market in particular although it remained "comfortable" with full-year expectations. Mr Allan blamed the market for being too obsessed with unavoidable changes to gross margins, caused by new product lines, rather than its strong cash position.

"This goes back to the bubble economy when people told me that you valued companies on revenue models. But that's completely bonkers unless you've got a business generating cash otherwise you go out of business," said Mr Allan. "I'm not going to sacrifice our cash line or covenants for the sake of margin."

Thus said the rate of revenue growth for the first quarter had exceeded the same period last year. Cashflow performance remained strong, it said, with positive cash flow after interest and capital investment compared with a negative position of £6.8m last year. Lower gross margins had been caused by the company selling more high-speed internet services and the strong growth in alternative telephone services supplied to BT's rivals such as BSkyB and Tele2.

"If we are being punished this much for delivering strong growth across our product set, a strong balance sheet, positive cash flow without writing off network assets or breaching banking covenants, like other companies, then all I can say is I'm glad I'm not running any of our rivals. We've been here before but I'm not going to change our strategy or focus."

As a way of countering its problems with gross margin erosion, Thus announced it was investing in its advanced telecoms network that will be able to deliver new internet protocol (IP) services that carry voice and data services using internet technology rather than traditional telecoms networks.

It has a signed a deal with Nortel Networks for advanced switching technology that it says should drive longer term margin expansion. Thus shares closed down 4.25 at 18.5p.

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