ArthroCare Reports Second Quarter 2007 Revenue of $80 Million, EPS of $0.37, Exceeding Consensus Estimates

AUSTIN, Texas AUSTIN, Texas, Jul 26, 2007 (BUSINESS WIRE) -- ArthroCare Corp. (Nasdaq:ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced that for the second quarter ended June 30, 2007, total revenues grew 21 percent to $79.5 million, compared with $66.0 million in the prior year's second quarter. ArthroCare's second quarter net income of $10.4 million, or $0.37 per share, grew 35 percent, compared to net income of $7.7 million, or $0.28 per share a year ago. This quarterly performance was due to accelerating growth in the Company's Spine and Sports Medicine businesses, reflecting new product launches, high volume manufacturing of key new products, and the benefits from continued investments in sales and marketing. Gross revenue and operating profit margin improvements of 2.6 and 0.9 points, respectively, also contributed to earnings growth.

"Through the first half of this year we have continued to aggressively pursue our core strategy of leveraging our platform technologies to develop breakthrough products and to put the infrastructure, clinical credibility, and reimbursement in place to drive the acceptance of those products in the marketplace," noted Mike Baker, CEO of ArthroCare.

REVENUE

In addition to product sales of $76.6 million, royalties, fees and other revenue was $2.9 million in the second quarter of 2007, which represents four percent of total revenue, compared to $2.2 million, or three percent of total second quarter 2006 revenue. International product sales increased 27 percent over 2006, led by Sports Medicine products.

BUSINESS UNIT PERFORMANCE

The Sports Medicine business unit produced sales growth of 13 percent during the quarter ended June 30, 2007 compared with the same period of 2006, and represented 61 percent of total product sales. Excluding the impact of product lines discontinued in July 2006, Sports Medicine sales increased 16 percent over the second quarter of 2006. Sales in the Spine business unit during the second quarter of 2007 grew 72 percent compared to the same period in 2006, with Spine sales representing 14 percent of product sales in the second quarter of 2007. The second quarter increase in ENT product sales over the comparable period of last year was 17 percent, with ENT sales representing 25 percent of product sales during the quarter.

OPERATIONS

Product margin was 72 percent in the second quarter of 2007, compared to product margin of 69 percent in the second quarter of 2006. Operating expenses were $44.8 million in the second quarter 2007, or approximately 56 percent of total revenue, compared to $36.0 million, or 55 percent of total revenue in the second quarter of 2006. This increase is primarily a result of increased sales and marketing expenses due to continued additions to our direct sales force and new product launches in the second quarter of 2007.

BALANCE SHEET

Cash, cash equivalents and short-term investments increased $10.3 million to $41.1 million as of June 30, 2007, compared to $30.8 million at December 31, 2006. Inventories decreased to $49.2 million from $51.5 million at December 31, 2006, while accounts receivable was $67.4 million at June 30, 2007 compared to $61.9 million at December 31, 2006. This represents 76 days sales outstanding which is in line with the first quarter and a four day improvement over fourth quarter.

BUSINESS OUTLOOK

The following statements are based on current expectations on July 26, 2007. These statements are forward-looking, and actual results may differ materially. These statements do not include the potential impact of any new businesses or license agreements the Company may enter into in future periods.

ArthroCare's business outlook for fiscal 2007 is as follows:

• The Company expects total revenue growth of at least 20 percent.
• The Company expects the Sports Medicine business unit to achieve revenue growth in the low teens.
• ENT business unit revenue growth is expected to be between 25 and 30 percent.
• Spine business unit revenue growth is anticipated to exceed 50 percent.
• The Company anticipates sequential improvement in quarterly revenue growth rates.
• The Company expects earnings per share growth greater than revenue growth. GAAP diluted EPS is forecast to be in the range of $1.40 to $1.50.
• The Company expects a 100 basis point improvement in both product and operating margins over the 2006 calendar year margins.
• ArthroCare's preliminary guidance for 2008 is for revenue growth of at least 20 percent, for continued improvements in margin, and for earnings to grow faster than revenue.