Stock-Based Compensation

Our stock-based compensation expense is associated with stock options, restricted stock units, or RSUs, and performance stock units, or PSUs, and is measured based on the estimated fair value of equity awards at the grant date.

We estimate the fair value of employee stock options on the date of grant using a binomial model and recognize the expense using a straight-line attribution method over the requisite employee service period. We use the closing trading price of our common stock on the date of grant, minus a dividend yield discount, as the fair value of awards of RSUs and PSUs. The compensation expense for the RSUs is recognized using a straight-line attribution method over the requisite employee service period while compensation expense for PSUs is recognized using an accelerated amortization model. We estimate the fair value of shares to be issued under our employee stock purchase plan using the Black-Scholes model at the commencement of an offering period in March and September of each year. Stock-based compensation for our employee stock purchase plan is expensed using an accelerated amortization model.

Our condensed consolidated statements of income include stock-based compensation expense, net of amounts capitalized as inventory, as follows:



	Three Months Ended				Six Months Ended
	July 27, 2014		July 28, 2013		July 27, 2014		July 28, 2013
	(In thousands)				(In thousands)
Cost of revenue	$	2,656	$	2,168	$	5,575	$	4,821
Research and development	21,462		18,555		41,956		40,490
Sales, general and administrative	14,297		11,672		26,405		20,481
Total	$	38,415	$	32,395	$	73,936	$	65,792

During the three and six months ended July 27, 2014, we granted 78,129 and 85,929 stock options, respectively, with a total grant-date fair value of $309.4 thousand and $345.3 thousand and a weighted average grant-date fair value of $3.96 and $4.02 per option, respectively. During the three and six months ended July 27, 2014, we granted 0.5 million and 3.7 million of RSUs and PSUs combined, with a total grant-date fair value of $8.4 million and $64.1 million and a weighted average grant-date fair value of $17.68 and $17.20 per share, respectively. The PSUs were granted during the first quarter of fiscal year 2015 to our CEO and senior management as approved by our Compensation Committee.

During the three and six months ended July 28, 2013, we granted 0.5 million and 3.3 million stock options, respectively, with an estimated total grant-date fair value of $1.4 million and $10.1 million and a weighted average grant-date fair value of $2.96 and $3.09 per option, respectively. During the three and six months ended July 28, 2013, we granted 0.7 million and 5.6 million RSUs with an estimated total grant-date fair value of $8.9 million and $66.3 million and a weighted average grant-date fair value of $13.49 and $11.93 per share, respectively.

Of the total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that were not expected to vest was $1.6 million and $11.5 million for the three and six months ended July 27, 2014, respectively, and $1.8 million and $13.7 million for the three and six months ended July 28, 2013, respectively. As of July 27, 2014 and January 26, 2014, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $235.6 million and $241.3 million, respectively, adjusted for estimated forfeitures. As of July 27, 2014 and January 26, 2014, we expected to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.2 years and 2.5 years, respectively. As of July 27, 2014 and January 26, 2014, we expected to recognize the unearned stock-based compensation expense related to RSUs and PSUs over an estimated weighted average amortization period of 2.6 years and 2.7 years, respectively.

The fair value of stock options granted under our equity incentive plan and shares issued under our employee stock purchase plan have been estimated at the date of grant with the following assumptions:



	Three Months Ended			Six Months Ended
	July 27, 2014		July 28, 2013	July 27, 2014		July 28, 2013
Stock Options	(Using a binomial model)
Expected life (in years)	2.5		2.4 - 3.4	2.5 - 3.2		2.4 - 3.4
Risk-free interest rate	2.5	%	1.8% - 2.7%	2.5% - 2.8%		1.8% - 2.7%
Volatility	31	%	30% - 33%	31	%	30% - 37%
Dividend yield	1.8	%	2.1% - 2.2%	1.8% - 1.9%		2.1% - 2.4%



	Three Months Ended				Six Months Ended
	July 27, 2014		July 28, 2013		July 27, 2014		July 28, 2013
Employee Stock Purchase Plan	(Using a Black-Scholes model)
Expected life (in years)	—		—		0.5 - 2.0		0.5 - 2.0
Risk-free interest rate	—		—		0.1% - 0.3%		0.1% - 0.3%
Volatility	—	%	—	%	31	%	37	%
Dividend yield	—	%	—	%	1.9	%	2.4	%

Equity Award Activity

The following summarizes the stock option, RSU and PSU activity under our equity incentive plans:



	Options Outstanding		Weighted Average Exercise Price
Stock Options	(In thousands)		(Per share)
Balances, January 26, 2014	32,504		$	14.22
Granted	86		$	18.66
Exercised	(6,291	)	$	12.89
Cancelled	(942	)	$	18.89
Balances, July 27, 2014	25,357		$	14.39



	RSUs and PSUs Outstanding		Weighted Average Grant-Date Fair Value
RSUs and PSUs	(In thousands)		(Per share)
Balances, January 26, 2014	18,852		$	13.82
Granted (1)	3,729		$	17.20
Vested	(3,319	)	$	13.33
Cancelled	(793	)	$	13.98
Balances, July 27, 2014	18,469		$	14.58

(1) Includes the total number of PSUs issuable if the maximum corporate financial performance target level for fiscal year 2015 is achieved. Depending on the actual level of achievement of the corporate performance goal at the end of fiscal year 2015, the range of PSUs issued could range from 1.4 million to 2.5 million shares.