Note 10 - Stockholders' Equity and Stock-based Compensation

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Shareholders' Equity and Share-based Payments [Text Block]

NOTE 10. Stockholders' Equity and Stock-based Compensation

Common Stock

The Company had reserved shares of common stock for future issuance as of December 31, 2020 as follows:

Options and RSUs outstanding under equity incentive plans
2000 Equity Incentive Plan	102,087
2012 Equity Incentive Plan	3,160,057
Shares available for future grants under an equity incentive plan
2012 Equity Incentive Plan	6,628,383
Total shares reserved for future issuance	9,890,527

Preferred Stock

Effective October 3, 2012, the Company is authorized to issue 20,000,000 shares of undesignated preferred stock with a par value of $0.001 per share. Each series of preferred stock will have such rights and preferences including dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price, and liquidation preferences as determined by the Board. As of December 31, 2020, and 2019, there were no issued or outstanding shares of preferred stock.

Equity Incentive Plan

2012 Equity Incentive Plan

The 2012 Equity Incentive Plan was adopted and approved in September 2012 and became effective on September 26, 2012. Under the 2012 Plan, the Company is authorized to grant to eligible participant's incentive stock options (ISOs), non-statutory stock options (NSOs), stock appreciation rights (SARs), restricted stock awards (RSAs), RSUs, performance units and performance shares equivalent to up to 15,699,245 shares of common stock as of December 31, 2020. The number of shares of common stock available for issuance under the 2012 Plan includes an annual increase on January 1 of each year by an amount equal to the least of 3,050,000 shares; 5% of the outstanding shares of stock as of the last day of the immediately preceding fiscal year; or an amount determined by the Board of Directors. Options may be granted with an exercise price that is at least equal to the fair market value of the Company's stock at the date of grant and are exercisable when vested. Options and RSU's granted generally vest over a period of up to four years. ISOs may only be granted to employees and any subsidiary corporations' employees. All other awards may be granted to employees, directors and consultants and subsidiary corporations' employees and consultants. Options, SARs, RSUs, performance units and performance awards may be granted with vesting terms as determined by the Board of Directors and expire no more than ten years after the date of grant or earlier if employment or service is terminated.

2000 Equity Incentive Plan

Under the 2000 Equity Incentive Plan (2000 Plan), the Company was authorized to grant to eligible participants either ISOs or NSOs. The ISOs were granted at a price per share not less than the fair market value at the date of grant. The NSOs were granted at a price per share not less than 85% of the fair market value at the date of grant. Options granted generally vest over a period of up to four years, with a maximum term of ten years. The 2000 Plan was terminated in connection with the closing of the Company's initial public offering, and accordingly, no shares are currently available for grant under the 2000 Plan. The 2000 Plan continues to govern outstanding awards granted thereunder.

Options granted under the 2000 Plan were immediately exercisable, and unvested shares are subject to repurchase by the Company. Upon termination of employment of an option holder, the Company has the right to repurchase at the original purchase price any issued but unvested common shares. The amounts paid for shares purchased under an early exercise of stock options and subject to repurchase by the Company are not reported as a component of stockholders’ equity until those shares vest. The amounts received in exchange for these shares are recorded as an accrued liability in the accompanying consolidated balance sheets and will be reclassified to common stock and additional paid-in capital as the shares vest.

Stock-based Compensation Expenses

The following table shows a summary of the stock-based compensation expense included in the consolidated statements of operations for the fiscal years ended December 31, 2020, 2019 and 2018:

	Year Ended December 31,
	2020		2019		2018
	(in thousands)
Cost of revenues	$	2,767	$	2,262	$	2,489
Research and development		13,502		11,151		7,961
Sales and marketing		5,785		4,984		4,650
General and administrative		17,981		16,495		14,990
Total stock-based employee compensation	$	40,035	$	34,892	$	30,090

The income tax benefit related to the stock-based compensation expenses was $5.5 million, $5.5 million and $4.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, the Company had $21.8 million of unrecognized employee compensation cost related to unvested stock options and $71.3 million of unrecognized compensation cost related to unvested RSU's that it expects to recognize over a weighted-average period of 2.7 years and 2.6 years, respectively. 

The fair value of each option granted to employees is estimated on the date of grant using the Black-Scholes-Merton option-pricing model based on the following assumptions:

	Year Ended December 31,
	2020		2019		2018
Expected term (in years)		4.5 to 5.5		4.4 to 6.6		4.5 to 5.0
Volatility		38% to 43%		40% to 46%		45% to 47%
Risk-free interest rate		0.3% to 1.4%		1.5% to 2.4%		2.5% to 3.0%
Dividend yield		—		—		—

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The volatility was estimated using the historical volatility derived from the Company's common stock. The Company has not historically declared any dividends and does not expect to in the future.

Stock Option Plan Activity

A summary of the Company’s stock option activity is as follows:

	Outstanding Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
								(in thousands)
Balance as of December 31, 2017		4,495,891		$	25.29		6.6	$	153,129
Granted		366,786		$	79.79
Exercised		(1,183,235	)	$	20.33
Canceled		(250,133	)	$	39.61
Balance as of December 31, 2018		3,429,309		$	31.79		6.4	$	149,935
Granted		496,145		$	87.10
Exercised		(901,290	)	$	27.55
Canceled		(157,489	)	$	71.04
Balance as of December 31, 2019		2,866,675		$	40.54		6.0	$	125,647
Granted		593,694		$	99.77
Exercised		(1,129,845	)	$	30.50
Canceled		(115,082	)	$	87.91
Balance as of December 31, 2020		2,215,442		$	59.07		6.5	$	139,121
Vested and expected to vest—December 31, 2020		2,071,441		$	56.39		6.3	$	135,647
Exercisable—December 31, 2020		1,290,452		$	34.69		4.7	$	112,502

The following table summarizes the outstanding and vested stock options at December 31, 2020:

	Outstanding						Exercisable
Exercise Price	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (Years)		Number of Shares		Weighted Average Exercise Price Per Share
4.4 - 20.8		266,447	$	13.25		2.1		266,447	$	13.25
22.31 - 25.17		130,550	$	24.16		4.3		130,550	$	24.16
25.56 - 25.56		264,824	$	25.56		5.3		264,824	$	25.56
26.86 - 34.97		227,072	$	30.72		3.9		227,072	$	30.72
36.25 - 52.6		232,792	$	40.24		5.4		215,601	$	39.80
59.95 - 86.35		307,387	$	80.11		8.3		77,644	$	74.90
87.26 - 89.55		189,217	$	88.48		8.6		52,147	$	88.42
93.08 - 93.08		223,744	$	93.08		9.9		—	$	—
94.45 - 104.8		273,709	$	97.76		8.8		56,167	$	94.91
121.65 - 121.65		99,700	$	121.65		9.6		—	$	—
		2,215,442	$	59.07		6.5		1,290,452	$	34.69

The weighted-average grant date fair value of the Company’s stock options granted during 2020, 2019 and 2018 was $35.49, $34.02 and $33.05, respectively. The total intrinsic value of options exercised during 2020, 2019 and 2018 was $77.5 million, $52.1 million and $71.7 million, respectively. Intrinsic value of an option is the difference between the fair value of the Company’s common stock at the time of exercise and the exercise price paid.

Restricted Stock Unit Activity

A summary of the Company’s RSU activity is as follows:

	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
Balance as of December 31, 2017		1,410,588		$	40.34
Granted		548,245		$	75.44
Vested		(525,375	)	$	39.87
Cancelled		(206,575	)	$	43.43
Balance as of December 31, 2018		1,226,883		$	55.71
Granted		595,985		$	81.59
Vested		(438,892	)	$	53.17
Cancelled		(169,158	)	$	65.51
Balance as of December 31, 2019		1,214,818		$	67.99
Granted		531,146		$	99.96
Vested		(475,853	)	$	62.57
Cancelled		(223,409	)	$	77.37
Balance as of December 31, 2020		1,046,702		$	86.78
Expected to vest as of December 31, 2020		961,926		$	86.02

The aggregate vesting date fair value of RSUs vested during 2020, 2019 and 2018 was $46.5 million, $37.9 million and $38.9 million, respectively.

Performance-Based Stock Options and Restricted Stock Units

On December 10, 2020, the compensation committee of the Company's board of directors (Compensation Committee) granted the equity award for 2021 to the Company’s Chairman and Chief Executive Officer, Philippe Courtot (Mr. Courtot). The first portion of the award consists of 69,401 RSUs that will vest in 16 quarterly installments beginning on November 1, 2020. The second portion of the award consists of a target number of 223,744 PSO, which will vest at the end of the three-year performance period from January 2021 through December 2023. The actual number of PSOs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the performance period.

On November 2, 2019, the Compensation Committee granted the equity award for 2020 to Mr. Courtot. The first portion of the award consists of 48,683 RSUs that will vest in 16 quarterly installments beginning on December 1, 2019. The second portion of the award consists of a target number of 123,856 PSOs, which will vest at the end of the three-year performance period from January 2020 through December 2022. The actual number of PSOs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth and free cash flow per share growth during the performance period.

On December 21, 2018, the Compensation Committee granted the equity award for 2019 to Mr. Courtot. The first portion of the award consists of 56,250 RSUs that will vest in 16 quarterly increments beginning on January 1, 2019. The second portion of the award consists of a target number of 33,089 PSU, which will vest at the end of the three-year performance period from January 2019 through December 2021. The actual number of PSUs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth during the three-year performance period from January 2019 through December 2021 and Adjusted EBITDA margin for the fiscal year of 2021. The third portion of the award consists of a target number of 33,088 PSUs, one third of which (11,030 target PSUs) will vest at the end of each fiscal year of 2019, 2020 and 2021. The actual number of PSUs eligible to vest at each vesting date range from 0% to 200% of the target number, depending on the level of achievement of goals related to revenue growth and Adjusted EBITDA margin for each of those years.

The Compensation Committee, in consultation with its independent compensation consultant, designed these awards so that in each year greater than 50% of the compensation was based on the achievement of performance goals linked to metrics designed to drive the creation of shareholder value. The vesting of these awards is conditioned on Mr. Courtot’s continued service through the vesting dates or, for PSOs and PSUs, the dates that performance is certified in addition to the achievement of performance goals. If Mr. Courtot’s employment is terminated (a) by reason of death or disability or (b) by the Company for reasons other than cause or good reason within 12 months following a change in control, then 100% of any unvested portions of these awards will vest, with any vesting in connection with change in control terminations conditioned upon the effectiveness of a release of claims in favor of the Company .

During the year ended  December 31, 2020, 14,864 PSUs, which represent 135% of the target, vested as a result of the Company achieving the corresponding level of performance goals for the fiscal year of 2019.

On  June 10, 2020, the board of directors approved changes in the performance targets for certain previously granted PSO and PSU. Based on the projected performance levels expected to be achieved for those awards as of  June 10, 2020, the modification resulted in an incremental expense of $7.5 million, which is expected to be recognized over 12 quarters beginning with the quarter ended  June 30, 2020. This amount  may change based upon actual performance achieved and updates to estimates of future performance during the remainder of the performance periods. During the year ended  December 31, 2020, $0.9 million of incremental expenses due to the modification were recognized.

During the year ended December 31, 2020, stock-based compensation expense of $0.2 million and $2.8 million, including changes due to modifications, were recognized for PSOs and PSUs. During the year ended December 31, 2019, stock-based compensation expense of $0.3 million and $0.9 million were recognized for PSOs and PSUs, respectively.

Share Repurchase Program

On February 5, 2018, the Company's board of directors authorized a $100.0 million two-year share repurchase program, which was announced on February 12, 2018. On each of October 30, 2018,  October 30, 2019 and  May 7, 2020, the Company announced that its board of directors had authorized an increase of $100.0 million to the share repurchase program, resulting in an aggregate authorization of $400.0 million. Shares may be repurchased from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act of 1934, including pursuant to a pre-set trading plan adopted in accordance with Rule 10b5-1 under the Exchange Act, until February 14, 2022.

Repurchased shares are retired and reclassified as authorized and unissued shares of common stock. On retirement of the repurchased shares, common stock is reduced by an amount equal to the number of shares being retired multiplied by the par value. The excess amount that is retired over its par value is first allocated as a reduction to additional paid-in capital based on the initial public offering price of the stock, with the remaining excess to retained earnings.

During the year ended December 31, 2020 and 2019, the Company repurchased 1,292,750 and 1,026,455 shares of its common stock for approximately $126.7 million and $86.4 million, respectively. All share repurchases were made using cash resources. As of  December 31, 2020 and 2019, approximately $101.8 million and $128.5 remained available for share repurchases pursuant to the Company's share repurchase program.

On February 10, 2021, the Company announced that its Board of Directors authorized an additional $100.0 million to the original share repurchase program authorization, increasing the total amount of authorized repurchase to $500.0 million.