ArthroCare's Third Quarter 2007 Earnings Grow 28 Percent; Company Increases Fourth Quarter Guidance

AUSTIN, Texas--(BUSINESS WIRE)--Oct. 22, 2007--ArthroCare Corp. (Nasdaq:ARTC), a leader in developing state-of-the-art, minimally invasive surgical products, announced that for the third quarter ended September 30, 2007, total revenues grew 21 percent to $78.5 million, compared with $64.7 million in the prior year's third quarter. ArthroCare's third quarter net income of $11.1 million, or $0.39 per share, grew 28 percent, compared to net income of $8.7 million, or $0.31 per share a year ago. Quarterly performance includes growth in each of the Company's business units, including a 95 percent increase in spine sales, as well as a 3.8 point improvement in gross profit margin. Quarterly revenue growth reflects the positive impact of new products, the move of key new products from launch stage into high volume manufacturing, as well as the benefits from multi-year investments in sales and marketing.

"Our strong performance in Q3 leaves us well positioned to accomplish our strategic and financial objectives for the full year," noted Mike Baker, CEO of ArthroCare.

REVENUE

In addition to third quarter product sales of $75.5 million, royalties, fees and other revenue was $3.0 million in the third quarter of 2007 compared to $2.6 million in the third quarter of 2006, which represents four percent of total revenue in each of these periods. International product sales increased 35 percent in the third quarter over the third quarter 2006, led by Sports Medicine products in the Company's direct distribution markets.

BUSINESS UNIT PERFORMANCE

The Sports Medicine business unit produced sales growth of 11 percent during the third quarter of 2007 compared with the same period of 2006, and represented 62 percent of total product sales in the quarter. Sales in the Spine business unit during the third quarter of 2007 grew 95 percent compared to the same period in 2006, with Spine sales representing 15 percent of product sales in the third quarter of 2007. The third quarter increase in ENT product sales over the comparable period of last year was 24 percent, with ENT sales representing 23 percent of product sales during the quarter.

OPERATIONS

Product margin was 72 percent in the third quarter of 2007, compared to product margin of 68 percent in the third quarter of 2006. The four-point improvement in product margin is attributable to favorable product mix, improved international profitability and lower material costs. Operating expenses were $43.8 million in the third quarter of 2007 compared to $32.8 million in the third quarter of 2006. The increase in expense is principally driven by an increase in sales employees and additional marketing expenditures to support emerging spine and oncology opportunities.

BALANCE SHEET

Cash, cash equivalents and short-term investments increased $24.1 million to $54.9 million as of September 30, 2007, compared to $30.8 million at December 31, 2006. Inventories increased $0.9 million or 2 percent to $52.4 million from $51.5 million at December 31, 2006. Accounts receivable increased 16 percent in line with revenue growth to $71.7 million from $61.9 million at December 31, 2006.

BUSINESS OUTLOOK

The following statements are based on current expectations on October 22, 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 for the calendar year to be at least 20%.
• The Company expects GAAP diluted EPS for the fourth quarter to be $0.48 to $0.50 and GAAP diluted EPS for the full calendar year to be $1.48 to $1.50.

ArthroCare will provide preliminary guidance for 2008 at its October 24th Analyst Meeting.