13. STOCK-BASED COMPENSATION

The following table presents the stock-based compensation expense included in the Company’s consolidated statements of operations:



(in thousands)	2018			2017			2016
Cost of revenues	$	16,862		$	14,573		$	11,459
Selling and marketing	23,237			15,720			12,464
Research and development	15,274			13,618			10,043
General and administrative	8,489			9,402			6,513
Acquisition-related	—			—			342
	$	63,862		$	53,313		$	40,821
Income tax benefit	$	(13,383	)	$	(12,113	)	$	(12,198	)

The Company periodically grants stock options and restricted stock units (“RSUs”) for a fixed number of shares upon vesting to employees and non-employee Directors.

Most of the Company’s stock-based compensation arrangements generally vest over five years with 20% vesting after one year and the remaining 80% vesting in equal quarterly installments over the remaining four years. The Company’s stock options have a ten-year term. The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as if it were an individual grant. The amount of stock-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the actual expense over the vesting period only for the shares that vest.

Employees may elect to receive 50% of their target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. If elected by an employee, the equity amount is equal in value on the date of grant to 50% of his or her target incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee’s target incentive opportunity by 85% of the closing price of its common stock on the grant date, less the present value of expected dividends during the vesting period. If elected, the award vests 100% on the CICP payout date of the following year for all participants. Vesting is conditioned upon the performance conditions of the CICP and on continued employment; if threshold funding does not occur, the RSUs will not vest. The Company considers vesting to be probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning, on the grant date and ending on the vesting date.

The Company grants awards that allow for the settlement of vested stock options and RSUs on a net share basis (“net settled awards”). With net settled awards, the employee does not surrender any cash or shares upon exercise. Rather, the Company withholds the number of shares to cover the exercise price (in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares that would otherwise be issued upon exercise or settlement. The exercise of stock options and settlement of RSUs on a net share basis results in fewer shares issued by the Company.

Share-based compensation plans:

2004 Long-Term Incentive Plan (as amended and restated)

In 2004, the Company adopted the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) to provide employees, non-employee Directors, and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options. Subsequent amendments to the plan increased the number of shares authorized for issuance under the plan to 30 million, extended the term of the plan to 2026, and limited annual compensation to any non-employee Director to $0.5 million.

As of December 31, 2018, approximately 9.6 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.

2006 Employee Stock Purchase Plan

In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) pursuant to which the Company’s employees are entitled to purchase up to an aggregate of 1 million shares of common stock, at a price equal to at least 85% of the fair market value of the Company’s common stock on either the commencement date or completion date for offerings under the plan, whichever is less, or such higher price as the Company’s Board of Directors may establish from time to time. Until the Company’s Board of Directors determines otherwise, the Board has set the purchase price at 95% of the fair market value on the completion date of the offering period. As a result, the 2006 ESPP is non-compensatory and is tax qualified. Therefore, as of December 31, 2018, no compensation expense related to shares issued under the plan had been recognized. In October 2012, the Company’s Board of Directors amended the term of the 2006 ESPP such that it will continue until there are no shares remaining to be issued under the plan or until the plan is terminated by the Board of Directors, whichever occurs first.

As of December 31, 2018, approximately 0.4 million shares had been issued thereunder.

Shares available for issuance

As of December 31, 2018, there were approximately 8.3 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of approximately 7.7 million shares under the 2004 Plan and approximately 0.6 million shares under the 2006 ESPP.

Grant activity

During 2018, the Company issued approximately 1.4 million shares to its employees and directors under the Company’s share-based compensation plans.

Stock options

The Company estimates the fair value of stock options using a Black-Scholes option valuation model. Key inputs used to estimate the fair value of stock options include the exercise price of the award, expected term of the option, expected volatility of the Company’s common stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The exercise price for stock options is greater than or equal to the fair market value of the shares at the grant date.

The weighted-average grant-date fair value for stock options granted in 2018, 2017, and 2016, was $18.03, $13.79, and $8.31 per share, respectively.

The weighted-average assumptions used in the Black-Scholes option valuation model are:



	2018		2017		2016
Expected annual volatility ⁽¹⁾	34	%	35	%	40	%
Expected term in years ⁽²⁾	4.5		4.5		4.4
Risk-free interest rate ⁽³⁾	2.6	%	1.9	%	1.2	%
Expected annual dividend yield ⁽⁴⁾	0.4	%	0.5	%	0.6	%

⁽¹⁾ The expected annual volatility for each grant is determined based on the average of historical daily price changes of the Company’s common stock over a period which approximates the expected option term.

⁽²⁾The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.

⁽³⁾ The risk-free interest rate is based on the yield of U.S. Treasury securities with a maturity that is commensurate with the expected option term at the time of grant.

⁽⁴⁾The expected annual dividend yield is based on the weighted-average of the dividend yield assumptions used for options granted during the applicable period.

The following table summarizes the combined stock option activity under the Company’s stock option plans for 2018:



	Shares (in thousands)		Weighted-average Exercise Price		Weighted-average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Options outstanding as of January 1, 2018	7,130		$	26.10
Granted	1,705		58.42
Exercised	(1,422	)	20.88
Forfeited	(442	)	35.50
Options outstanding as of December 31, 2018	6,971		$	34.47

Vested and expected to vest as December 31, 2018	5,841		$	33.23	7.0	$	99,999

Exercisable as of December 31, 2018	2,893		$	22.16	5.7	$	74,650

The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee at exercise) in 2018, 2017, and 2016 was $56.8 million, $62.6 million, and $19.9 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2018 is based on the difference between the closing price of the Company’s stock of $47.83 and the exercise price of the applicable stock options.

As of December 31, 2018, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of approximately $21.1 million that is expected to be recognized as expense over a weighted-average period of approximately 2.3 years.

RSUs

RSUs deliver to the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting. The Company values its RSUs at the fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date, less the present value of expected dividends during the vesting period, as the recipient is not entitled to dividends during the requisite service period.

The weighted-average grant-date fair value for RSUs granted in 2018, 2017, and 2016 was $58.52, $46.07, and $25.54, respectively.

The following table summarizes the combined RSU activity for all grants, including the CICP, under the 2004 Plan for 2018:



	Shares (in thousands)		Weighted- Average Grant-Date Fair Value		Aggregate Intrinsic Value (in thousands)
Nonvested as of January 1, 2018	2,901		$	31.97
Granted	1,212		58.52
Vested	(1,144	)	31.88
Forfeited	(318	)	36.74
Nonvested as of December 31, 2018	2,651		$	43.69	$	126,781
Expected to vest as of December 31, 2018	1,938		$	44.83	$	92,661

The fair value of RSUs vested in 2018, 2017, and 2016 was $66.5 million, $59.0 million, and $29.2 million, respectively. The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31, 2018 is based on the closing price of the Company’s stock of $47.83 on December 31, 2018.

As of December 31, 2018, the Company had approximately $42.3 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected to be recognized as expense over a weighted-average period of approximately 2.1 years.