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Mark Mahaney Smith Barney CitigroupCitigroup analyst Mark Mahaney on Blue Nile Inc.'s Q1 results (see also full conference call transcript):

* NILE reported a Modest Beat & Raise quarter -- Revenue of $50.7MM vs. $50.0MM Street/$48.4MM Citi & GAAP EPS of $0.13 vs. $0.12 Street/Citi. Revenue upside came from higher than expected avg order size.

* Fundamentals mixed -- Y/Y rev growth accelerated from 13.5% in December to 14.9% in March, though EBITDA margin decreased 120 bps Y/Y to 7.8%. Key -- TTM FCF conversion remained a stellar and sector-high 152%.

* Our estimates rise -- '06 GAAP EPS from $0.70 to $0.71; PT from $41 to $42.

* Reit the Buy. Despite rising marketing & metals costs & tiny int'l presence, we see NILE doing 18% Y/Y rev growth in June. What happens when the first 2 factors eventually abate or NILE improves its marketing efficiencies? And what happens when NILE hits stride internationally? With this model's leverage, EPS growth could rapidly accelerate. Put that with a 5% FCF yield, a large share buyback, and a high short position...and you got our #1 small cap idea.