Sterne Agee analysts Robert Breza and Jean-Baptiste Jouve take a close look at Adobe Systems Incorporated (NASDAQ:ADBE) in light of their recent strong quarter.

Adobe

After a strong quarter of results beating consensus across the board, we believe that Adobe Systems Incorporated (NASDAQ:ADBE) will continue to benefit from the Creative Cloud offering adoption for increased market share, while converting massively to a recurring subscriptions model. In our opinion, Adobe Systems Incorporated (NASDAQ:ADBE) is well on its way to posting $2.00 in EPS in FY15 and greater than $3.00 in FY16. We expect the Digital marketing summit next week to serve as a catalyst with many new product announcements and we reiterate our Buy rating.

Adobe Q1/14 Beat

Q1/14 Revenue/EPS of $1,000.1M/$0.30 were comfortably above consensus estimates of $973.1M/$0.26 and 3%/23% above our estimates of $965M/$0.24. Both metrics came in above the higher-end of the range [$950M-1,000M]/[$0.22-$0.28] of guidance.

Adobe Healthy Creative Cloud Momentum

The strong growth in adoption of the Creative Cloud contributed significantly to the positive results, adding subscribers at an accelerating rate, with 1.844M total subscriptions, above our 1.813M estimate, en route to exceed the three million subscribers target for FY14. Creative ARR also grew remarkably to $987MM, above our $961MM estimate, driving total Digital Media ARR to $1.15B, slightly shy of our $1.17M estimate.

Subscription Revenue Accelerate

The quarter marks a milestone as more than 50% of revenue came from recurring subscriptions and exceeded perpetual licenses for the first time, driven by an overwhelming majority of 96% of Creative Could subscriptions purchased as annual plans. This trend will accelerate drastically until the end of the year with the end of the availability of Creative Suites perpetual licensing for Enterprises, supporting the increase in recurring revenue and providing ample visibility and steadiness to the business.

Adobe Digital Marketing Summit the Next Short-Term Catalyst

Adobe Systems Incorporated (NASDAQ:ADBE) will host its annual Summit digital marketing conference next week during which we expect significant new product announcements. Management hinted evolutions around further integration of the different solutions in a unified dashboard, as well as improvements around the management of marketing spend across multiple channels.

Valuation

Currently, Adobe Systems Incorporated (NASDAQ:ADBE) trades at P/S ratio of 7.3x our 2015 sales estimate, which is a discount to the Next Gen SaaS group mean multiple of 7.4x. Our $80 price target assumes that shares of Adobe Systems Incorporated (NASDAQ:ADBE) trade at 8.5x multiple on our FY/15 revenue estimate of $4,778B. In our opinion, the premium is warranted as the company continues to increase its overall percentage of recurring revenue and competitive market share.