(12) STOCK-BASED COMPENSATION

Valuation Assumptions

We estimate the fair value of stock-based awards on the date of grant. We recognize compensation costs for stock-based awards to employees based on the grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest.

The determination of the fair value of market-based restricted stock units, stock options and ESPP purchase rights is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We determine the fair value of our stock-based awards as follows:


•	Restricted Stock Units. The fair value of restricted stock units is determined based on the quoted market price of our common stock on the date of grant.

•

Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management that vest contingent upon the achievement of pre-determined market and service conditions (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is determined using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility, expected dividends and correlation coefficient.

•

Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan, as amended (“ESPP”), respectively, is determined using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. Expected volatility is based on a combination of historical stock price volatility and implied volatility of publicly-traded options on our common stock. Expected term is determined based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.

There were an insignificant number of stock options granted during the three and six months ended September 30, 2016 and 2015.

The estimated assumptions used in the Black-Scholes valuation model to value our ESPP purchase rights were as follows:



	ESPP Purchase Rights
	Three Months Ended September 30,
	2016		2015
Risk-free interest rate	0.5 - 0.6%		0.3 - 0.4%
Expected volatility	29 - 32%		32	%
Weighted-average volatility	31	%	32	%
Expected term	6 - 12 months		6 - 11.5 months
Expected dividends	None		None

There were no market-based restricted stock units granted during the three months ended September 30, 2016 and 2015.

Stock-Based Compensation Expense

Employee stock-based compensation expense recognized during the three and six months ended September 30, 2016 and 2015 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. In subsequent periods, if actual forfeitures differ from those estimates, an adjustment to stock-based compensation expense will be recognized at that time.

The following table summarizes stock-based compensation expense resulting from stock options, restricted stock units, market-based restricted stock units, and the ESPP purchase rights included in our Condensed Consolidated Statements of Operations (in millions):



	Three Months Ended September 30,				Six Months Ended September 30,
	2016		2015		2016		2015
Cost of revenue	$	1	$	1	$	2	$	1
Research and development	27		$	25	54		51
Marketing and sales	8		7		15		12
General and administrative	12		11		25		25
Stock-based compensation expense	$	48	$	44	$	96	$	89

During the three months ended September 30, 2016, we recognized a $9 million deferred income tax benefit related to our stock-based compensation expense. During the three months ended September 30, 2015, we did not recognize any benefit from income taxes related to our stock-based compensation expense due to the U.S. valuation allowance.

During the six months ended September 30, 2016, we recognized an $18 million deferred income tax benefit related to our stock-based compensation expense. During the six months ended September 30, 2015, we did not recognize any benefit from income taxes related to our stock-based compensation expense due to the U.S. valuation allowance.

As of September 30, 2016, our total unrecognized compensation cost related to restricted stock units and market-based restricted stock units was $352 million and is expected to be recognized over a weighted-average service period of 1.8 years. Of the $352 million of unrecognized compensation cost, $49 million relates to market-based restricted stock units. As of September 30, 2016, our total unrecognized compensation cost related to stock options was $5 million and is expected to be recognized over a weighted-average service period of 1.0 year.

During the three and six months ended September 30, 2016, we recognized $4 million and $37 million, respectively, of excess tax benefit from stock-based compensation deductions; this amount is reported in the financing activities on our Condensed Consolidated Statement of Cash Flows.

During the three and six months ended September 30, 2015, we recognized $25 million and $65 million, respectively, of excess tax benefit from stock-based compensation deductions; this amount is reported in the financing activities on our Condensed Consolidated Statement of Cash Flows.

Stock Options

The following table summarizes our stock option activity for the six months ended September 30, 2016:



	Options (in thousands)		Weighted- Average Exercise Prices		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding as of March 31, 2016	3,278		$	35.09
Granted	3		69.77
Exercised	(318	)	30.06
Forfeited, cancelled or expired	(31	)	35.84
Outstanding as of September 30, 2016	2,932		$	35.66	5.04	$	146
Vested and expected to vest	2,874		$	35.75	4.99	$	143
Exercisable as of September 30, 2016	2,337		$	36.83	4.44	$	114

The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of September 30, 2016, which would have been received by the option holders had all the option holders exercised their options as of that date. We issue new common stock from our authorized shares upon the exercise of stock options.

Restricted Stock Units

The following table summarizes our restricted stock unit activity for the six months ended September 30, 2016:



	Restricted Stock Rights (in thousands)		Weighted- Average Grant Date Fair Values
Outstanding as of March 31, 2016	7,157		$	44.04
Granted	2,330		75.31
Vested	(3,384	)	35.43
Forfeited or cancelled	(364	)	55.26
Outstanding as of September 30, 2016	5,739		$	61.10

The weighted-average grant date fair values of restricted stock units granted during the three and six months ended September 30, 2016 were $79.16 and $75.31, respectively.

Market-Based Restricted Stock Units

Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the market-based restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be received at vesting will range from zero percent to 200 percent of the target number of market-based restricted stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, generally over a one-year, two-year cumulative and three-year cumulative period. In the table below, we present shares granted at 100 percent of target of the number of market-based restricted stock units that may potentially vest. The maximum number of shares of common stock that could vest is approximately 0.7 million for market-based restricted stock units granted during the six months ended September 30, 2016. As of September 30, 2016, the maximum number of shares that could vest is approximately 1.3 million for market-based restricted stock units outstanding.

The following table summarizes our market-based restricted stock unit activity for the six months ended September 30, 2016:



	Market-Based Restricted Stock Units (in thousands)		Weighted- Average Grant Date Fair Value
Outstanding as of March 31, 2016	636		$	64.49
Granted	353		98.04
Vested	(558	)	50.08
Vested above target	238		44.99
Forfeited or cancelled	(15	)	86.39
Outstanding as of September 30, 2016	654		$	87.29

Stock Repurchase Program

In May 2014, a special committee of our Board of Directors, on behalf of the full Board of Directors, authorized a two-year program to repurchase up to $750 million of our common stock. Since inception, we repurchased approximately 9.2 million shares for approximately $394 million under this program.

In May 2015, our Board of Directors authorized a program to repurchase up to $1 billion of our common stock. This stock repurchase program, which expires on May 31, 2017, supersedes and replaces the stock repurchase authorization approved in May 2014. Under this program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase any specific number of shares under this program and it may be modified, suspended or discontinued at any time. During the three and six months ended September 30, 2016, we repurchased approximately 1.6 million and 3.5 million shares for approximately $127 million and $256 million, respectively. We continue to actively repurchase shares.

The following table summarizes total shares repurchased during the three and six months ended September 30, 2016 and 2015:



	May 2014 Program			May 2015 Program			Total
(in millions)	Shares	Amount		Shares	Amount		Shares	Amount
Three months ended September 30, 2016	—	$	—	1.6	$	127	1.6	$	127
Six months ended September 30, 2016	—	$	—	3.5	$	256	3.5	$	256
Three months ended September 30, 2015	—	$	—	1.8	$	126	1.8	$	126
Six months ended September 30, 2015	1.0	$	57	3.0	$	201	4.0	$	258