Stock-Based Compensation

3 Months Ended

Apr. 30, 2013

Stock-Based Compensation [Abstract]

STOCK-BASED COMPENSATION

6. STOCK-BASED COMPENSATION

Stock-Based Compensation Plans

In March 2006, the Company established the 2006 Stock Incentive Plan (the “2006 Plan”) governing, among other things, the grant of stock options, restricted stock units (“RSUs”), and other forms of share-based incentives to its employees, directors and consultants. In the quarter ended October 31, 2009, the Company completed a tender offer permitting all eligible employees and its independent directors to exchange, on a one-for-one basis, stock options granted under the 2006 Plan for new stock options granted under Serena’s Amended and Restated 2006 Stock Incentive Plan (the “Amended 2006 Plan”) having a lower exercise price and different vesting terms. In addition, as part of the Company’s merger in March 2006, the Company assumed certain stock options that were held by management participants immediately prior to the merger.

Stock Option Activities

The stock option grants generally vest either over a three-year period (“time-based options”) or based on the achievement of certain performance targets over a three fiscal year period (“performance-based options”). All options granted have a maximum contractual life of ten years from the date of grant. For performance-based options, the actual number of option grants eligible to vest during a fiscal year range from 50% to 150% of the number of options initially granted, and is dependent upon levels of achievement of certain performance targets if baseline performance conditions are met. Based upon current expectations of performance targets achievement, approximately $0.1 million of expense is expected to be recognized over the remaining future vesting periods of approximately 3 years.

The following table sets forth a summary of stock option activity:

	Options Available for Grant			Number of Options Outstanding			Weighted Average Exercise Price (Per share)		Weighted Average Grant Date Fair Value (Per share)		Weighted Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value (In  thousands)
Balances as of January 31, 2013		4,112,156			7,799,011		$	3.02				5.75	$	1,091
Granted		(3,055,000	)		3,055,000			2.50	$	0.84
Exercised		—			(13,167	)		1.25					$	16
Expired (1)		—			(115,516	)		—
Cancelled		1,585,191			(1,585,191	)		3.11
Restricted stock units granted, net of cancellations (2)		(2,187,100	)		—			—
Balances as of April 30, 2013		455,247			9,140,137		$	2.85				7.13	$	930
As of April 30, 2013:
Vested and expected to vest					8,701,743		$	2.85				7.07	$	930
Vested and exercisable					3,176,656		$	2.69				5.07	$	930

(1) Represents cancelled options which are not returned to the available-for-grant stock option pool.

(2) RSUs are granted from the available-for-grant stock option pool. In the three months ended April 30, 2013, a total of 2.2 million units were granted with no units cancelled and returned to the available-for-grant stock option pool.

The pre-tax intrinsic value of options exercised represents the difference between the fair value of the Company’s common stock on the date of exercise and the exercise price of each option.

Aggregated intrinsic value represents the difference between the fair value of the Company’s stock on the date of grant and the exercise price multiplied by the number of related options. To assist management in determining the estimated fair value of the Company’s common stock, the Company engages a third-party valuation specialist to perform a valuation on a semi-annual basis as of January 31 and July 31. In estimating the fair value of the Company’s common stock, the external valuation firm employs a two-step approach that first estimates the fair value of the Company as a whole, and then allocates the adjusted value of shareholders’ equity to the Company’s common stock.

Restricted Stock Unit Activities

Restricted Stock Units (“RSUs”) generally vest on the third anniversary of the date of grant.

The following table sets forth a summary of RSU activity:

	Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value (In  thousands)
Balances as of January 31, 2013		445,000		$	3.42		1.71	$	1,113
Granted		2,187,100			2.50
Vested		(100,000	)		3.08
Cancelled		—			—
Balances as of April 30, 2013		2,532,100		$	2.64		2.76	$	6,330
As of April 30, 2013:
Vested and expected-to-vest RSUs		2,198,215					2.75	$	5,496

Stock-Based Compensation Expense

The Company determines the fair value of its stock options utilizing the Black-Scholes option pricing model, which incorporates various assumptions including volatility, risk-free interest rate, expected term, and dividend yield. The Company determines the fair value of its RSUs based upon the fair value of the shares of its common stock at the date of grant.

The Company utilizes the graded-vesting attribution method for recognizing stock-based compensation expense. Compensation expense is only recorded for those awards that are expected to vest. Compensation expense for awards with performance-based vesting is recognized only for awards that are deemed probable of achieving the performance condition over the performance-based vesting period.

As of April 30, 2013, total unrecognized compensation costs related to unvested stock options and RSUs were $3.3 million and $6.1 million, respectively. Costs related to unvested stock options are expected to be recognized over a period ranging from approximately 2 to 3 years and costs related to the RSUs are expected to be recognized over a period of 3 years from the grant date.

Stock-based compensation expense for the three months ended April 30, 2013 and 2012 is categorized as follows (in thousands):

	Three Months Ended April 30,
	2013			2012
Cost of revenue - maintenance	$	16		$	16
Cost of revenue - professional services		(28	)		9
Sales and marketing		173			137
Research and development		107			64
General and administrative		239			258
Total stock-based compensation expense		507			484
Income tax benefit		(193	)		(188	)
Total stock-based compensation expense, net of tax	$	314		$	296