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ArthroCare Corporation (ARTC)

Q1 2008 Earnings Call

April 21, 2008, 4:30 pm ET

Executives

Cory Irvin – Director of Investor Relations

Michael Baker – President and CEO

Michael Gluk – Senior Vice President and CFO

Analysts

Mark Mullikin – Piper Jaffray

James Sidoti – Sidoti & Company LLC

Daj Denhoy – Bear Stearns

Steven Lichtman – Banc of America Securities LLC

Bill Plovanic – Canaccord Adams

Joanne Wuensch – BMO Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2008 Financial Results and Business Update. (Operator Instructions) It is my pleasure to introduce Ms. Cory Irvin, Director of Investor Relations. Please go ahead, ma’am.

Cory Irvin

Good afternoon and welcome to ArthroCare’s First Quarter 2008 Conference Call. Joining us on today’s call are Mike Baker, President and CEO of ArthroCare, and Mike Gluk, ArthroCare’s CFO.

By now you all should’ve seen a copy of today’s press release which is released earlier this afternoon. But if you haven’t, it is available on our website www.arthrocare.com. A live and on-demand webcast of the conference call is also available on our website. Following introductory comments by management, we will open up the lines for a short question-and-answer session. In order to give as many of you as possible an opportunity to ask questions, we will accept one question and one follow-up per caller, after which we welcome callers to rejoin the queue.

Before we begin, we would like to advise you: Other than historical information, the matters we will be discussing today to consist of forward-looking statements. These statements are subjects to the risks and uncertainties detailed in our Securities and Exchange Commission filing, including our 10-K for the year ended December 31, 2007. Actual results could differ materially. The statements made in this conference call are based on the information available to ArthroCare today, and the Company does not undertake any obligation to update or correct them before its regularly scheduled call at the end of next quarter.

I will now turn the call over to Mike Baker.

Michael Baker

Thanks, Cory. In our last conference call, we laid out our initiatives and financial expectations for 2008. These included an ambitious product development plan leveraging our technology platforms to reduce a series of compelling new products, a broad clinical research program to establish new indications like Topaz and to drive market acceptance for existing indications like plasma disc decompression and aggressive investment in strengthening our global distribution channels in each of our business segments.

We now have the first quarter in the books and we are happy to be able to report that the business is continuing to perform extremely well, tracking ahead of plan on both the revenue and earnings per share basis, and that we are on track to accomplish all of our strategic and financial objectives for the year.

In Q1, we saw significant growth in product sales across all of our business segments with all three segments reporting increases of more than 20% for the second quarter in a row. Product sales in our largest business, Sports Medicine, increased by more than 25% from Q1 of last year; and it appears likely that this segment will continue to track ahead of guidance for the balance of the year. Our Spine business continued to grow rapidly and growth in our ENT business accelerated as we saw the beginnings of traction in both new indications and European tonsillectomy penetration.

As you can see from the first quarter results, we are well positioned to accomplish all of our objectives for the year and currently believe that we are poised to turn in a very financial performance in 2008 with revenue and EPS growth percentages even greater than the excellent results that we posted in 2007.

While the long-term demographic trends are purely in our favor, as you’ll hear today, the business is currently being driven by a potent combination of market share gains and our competitive position continues to improve in each of our businesses and increased penetration of breakthrough highly proprietary new therapies into significant unmet medical needs. We also continue to aggressively pursue clinical research on the efficacy of our products, and it is also important to understand that many of our products are used in therapies that greatly improve outcomes while simultaneously costing patients in the overall healthcare system less than traditional procedures. We believe that this combination has improved outcomes, matched with diminished costs is a key part of the success of our strategy.

Before Mike Gluk takes you through the financials, I’d like to take a moment to give you a brief update on several of the key initiatives in each of our business units. Let me start with Sports Medicine. As you can tell by the numbers from the last two quarters, our Sports Medicine business is on a serious role. Sports Medicine posted quarter-over-quarter revenue growth of over 25% in Q1 making it the second quarter in a row, plus 20% organically driven revenue growth in this our largest and best established business.

This growth is clearly being driven by the compelling new products that we introduced in the last few quarters combined with the investments that we made in strengthening our distribution channel. The strength is not limited in any one area or product line. We believe that we are taking market share from competitors across the entire spectrum of this business, and we are not seeing any competitive initiatives in the horizon that could disrupt this momentum.

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