Most memorable order was a $195 garnet pendant that was shipped to a customer in Texas in late March. This order was very special because, as it shipped, the company passed $1 billion in cumulative revenue since the inception of the company less than eight years ago. This was a tremendous milestone for the company.

Second Quarter 2007 Outlook

- The company expects net sales to be between $65.5 million and $67.5 million.
- Net income is expected to be 16 cents per share to 17 cents per share. This guidance includes the estimated impact of stock compensation expense of approximately 5 cents per share.

Fiscal 2007 Outlook

The company is raising financial guidance for the full year.

- The company expects net sales to be between $295 million and $305 million. This range is an increase from previous guidance for 2007 net sales of $290 million to $300 million.
- The company expects net income per share to be between 86 cents and 91 cents, an increase from previous EPS range of 80 cents per share to 85 cents per share. This guidance includes the estimated impact of stock compensation expense of approximately 24 cents per share.
- Actual stock-based compensation expense will be based on the nature, timing and amount of stock options granted, the assumptions used in valuing these options and other factors.
- Then company expects capital expenditures of approximately $5 million, which includes investments related to the expansion of US fulfillment center and a new international facility. - The effective tax rate for financial statement purposes for the remainder of 2007 is expected to be approximately 35.2%.

Key questions from the first quarter earnings call conducted by Blue Nile, Inc. on May 07, 2007.

Scott Devitt (Stifel Nicolaus): The outperformance that you attributed to the high-dollar items in the quarter seems to have other drivers as well. You noted one-day improvement in lead times that would have been beneficial around Valentine’s Day. Could you quantify that in the customized diamond jewelry category?

Diane Irvine: The company has reduced its lead time in customized diamond jewelry from a four business day to a three business day receipt by the customer. The example would be if a customer places an order for a diamond on Monday before 3:00 PM Eastern time, they will receive their completed product on Thursday, in three business days. This is unmatched timeframe looking at any other business. The company could not quantify that, but that has an impact on conversion. Valentine’s Day was not the only one that had an improvement. Reducing that lead time helps every single day, not just during holidays. It may have a bigger impact during the holidays. That was one driver of growth, but not the only thing going on. Blue Nile felt strength across every product line, across every marketing vehicle, so it was hard to pull out a single marketing vehicle that drove it or a single product line. The average order size increased by 3.5% because the company had strength in entry level price points as well, which adds more names to the house file. The company spent last year working hard across the board on improving conversion partly by reducing lead times, partly by advances on the website and advances on the product line and some more rigorous analytics and marketing which are all starting to come together to pay off.

Scott Devitt (Stifel Nicolaus): Inventory was up 13% year-over-year. Could you talk about changes in the product selection on the domestic site year-over-year, and the three different categories that you have the diamond engagement, the non-engagement diamond and then all other?

Diane Irvine: All categories were strong. The company did perform well in inventory. One of the strongest parts of the business is the customized diamond jewelry. That is operating off of a virtual diamond inventory. It has in stock all the settings so that it can sell those products, but that is much lower inventory investment, as compared to what the company is selling there. Wedding bands are number-two product category. At non-diamond jewelry the company had great growth there. Sterling silver performed well.

Mark Vadon: The growth rate of what the company holds in stock versus items that it procures in real time was within a couple points of each other. It was not mix driving the inventory. Over the last the company has added a lot in selection. One of the negatives of that was that it did not feel it had gotten the traction in inventory turn that it would have liked. Internationally, there is a smaller business that is going to require holding inventory. When a distribution center is smaller, it does not turn as fast. That will be an item that the company is going to need to perform well on the US side to compensate for.

Scott Devitt (Stifel Nicolaus): Is the $1 million of incremental CapEx for international fulfillment in addition to an existing international fulfillment facility, or is that new?

Diane Irvine: All of that existed in the last quarter. The change is less international and more related to the company’s US fulfillment center expansion. The change from the last quarter’s update going to $5 million in CapEx for the year reflects the company’s updated cost estimates for its fulfillment center in Seattle as well as the international facility, which is just one facility.

Mark Mahaney (Citigroup): Is it reasonable to assume that the free cash flow growth should, throughout the balance of the year, reaccelerate and grow more in line with the operating income growth?

Diane Irvine: The company does not provide guidance, per se, with respect to free cash flow. The items that it is pointing out will have an impact for the full year where, it would expect something similar to last year. The company has a large one-time adjustment for cash taxes. Free cash flow will be healthy, in terms of its level, and then build off of that into next year. There is also a significant working capital dynamic there. There will be different results in the free cash flow growth as compared to operating income, for example, as a result of those items.

Mark Mahaney (Citigroup): One of the marketing tools that you have used since the beginning of the year has been Google Checkout. What results have you seen from that and to what extent may Google Checkout have contributed to the outperformance this quarter?

Mark Vadon: Google Checkout is still a young program. Blue Nile has implemented similar types of technology initiatives over the history of the company and they have never worked as well as it is. This one is driving volume. That is more than any of those the company has ever seen. At the same time, it was not a key driver of the growth of the business. The company hopes that it is going to do well over time. Today within the context of the larger business, it is not a driver of the top line at this point.

Mark Mahaney (Citigroup): Are there improvements in vendor terms that would cause the free cash flow growth to grow more organically, or in line with the operating income growth, or is it moving beyond these one-time cash tax issues?

Diane Irvine: The tax item will be the single biggest change going from 2006 to 2007. Looking out the next several years, the company will be able to continue to see improvements there. That will be a positive benefit this year. The other thing that happens, looking quarter-to-quarter in free cash flow in terms of working capital, is that the timing within a quarter of purchases makes a difference as to how the company ends the quarter. It is not always precise in terms of a quarter-end, but broadly, Blue Nile should continue to enjoy benefits in its working capital, in terms of days payable over the next several years.

Mark Vadon: Looking at the financial statements and the days outstanding of the company’s payables, there will not be a big amount of progress this year versus last year in days. The terms the company is getting are y better this year than last year. Last year – mid-quarter, Blue Nile lowered prices and accelerated out of the quarter. The payables for the quarter are better, stated higher than the COGS for the quarter, in the first quarter of 2006. As the company gets larger and becomes one of the largest buyers in the world now of diamonds that starts to carry a lot of weight in the supply chain.