JACKSON SECURITIES, LLC

Research for the Prudent Investor

Date 5/8/07 Blue Nile (NILE):Earnings

Current Price $47.35
review, maintain hold.
52WK HI $48.31 • Industry: Internet Services
52WK LO $24.10 • NILE: NASDAQ; $47.35
EPS (TTM) $0.80 • 12-month price target: $40.00
Shares Outstanding 16.5M HOLD initiated 2/7/07: $39.18
Market Cap. $750M Target: $40.00
Dividend Yield NA
Price/Earnings (TTM) 62X
Price/Sales (TTM) 3X
EV/Revenue (TTM) 2.6X
EV/EBITDA (TTM) 29X
EBITDA (TTM) $23M

Brian Bolan
Company Description
Director of Research
Blue Nile is a leading online retailer of high quality diamonds and fine
Technology jewelry. Blue Nile specializes in the customization of diamond jewelry with
Jackson Securities, LLC a “Build Your Own” feature that offers customers the ability to customize
300 S. Wacker Dr., Suite 2450 diamond rings, pendants and earrings. While not providing the lowest
Chicago, IL 60606 cost diamonds, the company believes its formula of no pressure sales,
Ph: (312) 253-0578
high quality educational material and reasonable prices will result in higher
Fax: (312) 986-0560 profits.
bbolan@jacksonsecurities.com Valuation and Recommendation:
Blue Nile reported another good quarter, but tempered enthusiasm for
next quarter by suggesting analysts recalibrate their model. Our previous
notion of a stretched valuation has been helped out by a $0.04 beat of
estimates, we maintain our hold rating and our price target is under review.

Jackson Securities, LLC seeks to do business with companies

covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect
the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decisions. Please
also refer to the important disclosures found on page number 5.
Analyst Certification is found on page number 5.
Blue Nile (NILE)

Earnings Release

Blue Nile (NILE) announced revenue of $67.9M for the first

quarter of 2007. This represents an increase of 34% from the same
period a year ago, and well above our estimate of $62M and the
Wall Street consensus of $61.9M.

The company posted earnings of $0.19 per share beating our

estimate of $0.15 and Wall Street consensus of $0.15 per share.
The out performance in earnings was due to higher than expected
interest income and other income. Please refer to the table at the
end of the report that highlights the margins for the quarter and the
difference from our estimates.

Orders and ASP’s

The average sales price (ASP) was $1,536, up 17% from a year
ago, and up 3.6% from the prior quarter. Orders were up 29%
from a year ago, well ahead of our expectations of approximately
41,000. We have modeled in assumptions for next quarter of an
ASP of $1685 and total orders just over of 40,000. Those
assumptions give us a topline number that is at the top end of
guidance.

Blue Nile posted 7 transactions that were priced at $100,000 or

more. Transactions of $25,000 or more grew by 84% from the year
ago period. In the prior quarter the company posted 40
transactions over $50,000 in value. The company believes that this
is a signal that there is more faith in the online model, and their
brand in particular.

On the conference call, management noted that there were

purchases of $140K and $130K. These high value transactions
also are a drag on gross margins, but as Blue Nile tries to build its
high value business they are willing to take a little less in order to
gain return business at lower price levels with higher gross
margins.

JACKSON Brian Bolan 2

SECURITIES, Director of Research
LLC
Blue Nile (NILE)

Traffic, Margins and the Mix

On the conference call, management noted that they continue to

see increases in traffic and conversions. In the quarter the
company noted they had double digit gains in both traffic and
conversions.

Shares outstanding and the buy back

During the quarter, Blue Nile repurchased 344,655 shares of its

common stock for about $13.5M. This works out to an average
price of $39.16. We would expect that the recent increase in share
price may slow the pace of future repurchases.

There is approximately $79.7M left on a buyback that expires in

August of 2008.

Guidance and our Model

In the earnings release, Blue Nile guided Wall Street to topline of

between $65.5M - $67.5M and a bottom line number between
$0.16 - $0.17 per share for the second quarter of 2007.

For the fiscal year 2007, the company guided to $295M - $305M
on the topline and between $0.86 - $0.91 per share on the bottom
line. The expected tax rate for 2007 is 35.2%.

Our model is calling for $67.9M on the topline and $0.17 per share
in earnings for the second quarter of 2007. A very modest 18.7%
gross margin is also assumed by our model which might even be
too low. As we did last quarter, an update of our estimates will be
published prior to the earnings release date.

For the year, we had modeled total revenues of $307M, just

slightly above the top end of the guided range. With an adjustment
for this quarters out performance on the top line, we expect this
number to creep higher by at least $4 million.

JACKSON Brian Bolan 3

SECURITIES, Director of Research
LLC
Blue Nile (NILE)

Recent Research

We noted only a few weeks ago that the valuation of Blue Nile is
getting somewhat lofty from a P/E perspective. This quarter did a
little to justify the lofty valuation on a trailing basis, but did help
solve the issue of rising costs. On a going forward basis, we
believe that our estimates are likely to change with regard to
interest income and the bottom line.

1Q07 Earnings Recap

Source: Company reports and Jackson Securities estimates

JACKSON Brian Bolan 4

SECURITIES, Director of Research
LLC
Blue Nile (NILE)

Disclosures:

Analyst Certification
I, Brian Bolan, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities
and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or
views expressed in this research report. I may be compensated in part based on the overall profitability of Jackson Securities, LLC, which
includes earnings from investment banking and all other aspects of the firm’s business.

Conflicts of interest:
Neither Jackson Securities nor any of its publishing analysts or their immediate family members has a position in the securities described
herein.

Compensation:
• The research analyst has not received compensation based upon investment banking revenues or from the subject company in the last
12 months.
• Jackson Securities has not in the last 12 months managed or co-managed a public offering of securities, received compensation for
investment banking services from the subject company or any compensation for products or services other than investment banking
• Jackson Securities will seek investment banking compensation from the subject company in the next 3 months.

Position as Officer or Director:

Neither the research analysts nor members of their immediate households occupy positions as an officer or director with the
company/companies mentioned in this report.

Market Making:
Jackson Securities does not make a market in this stock

Explanation of Ratings:
Buy - Expected 12-month absolute performance of +10% or higher than the market price at which time the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from the price at the time the rating was issued.
Sell - Expected 12-month absolute performance of –10% or lower than the market price at which time the rating was issued.

Distribution of Ratings:
Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:
Buys – 51.4% (18 of 35 active recommendations)
Holds – 45.7% (16 of 35 active recommendations)
Sells – 2.9% (1 of 35 active recommendations)

Jackson Securities has provided investment banking services within the previous 12 months with the following percentage of the companies
they have rated:

Buys – 0.0% (0 of 35 active recommendations)

Holds – 0% (0 of 35 active recommendations)
Sells – 0% (0 of 35 active recommendations)

Risks: General economic conditions, economic slowdown/recession, adverse industry news.

Other Important Disclosures and Disclaimers

Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy any securities mentioned herein. This material should not be construed as an offer to sell or the solicitation of an offer
to buy any securities mentioned herein in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. This document is for general information only,
and it does not constitute a personal recommendation or take into consideration the particular investment objectives, financial condition or financial needs of any clients. Before acting on any advise or
recommendation in this research report, clients should consider seek professional advice. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may
occur.

The information contained herein has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. Any opinions expressed herein are statements of our judgment
on the date appearing on this material only and are subject to change without notice. We endeavor to provide updates on a reasonable basis of the information discussed in research reports, but there may be reasons
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JACKSON Brian Bolan 5

SECURITIES, Director of Research
LLC
Blue Nile (NILE)

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JACKSON Brian Bolan 6

SECURITIES, Director of Research
LLC
Blue Nile (NILE)

JACKSON Brian Bolan 7

SECURITIES, Director of Research
LLC