(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 and Performance-Based Restricted Stock Units. The fair value of restricted stock units and performance-based restricted stock units (other than market-based 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 no ESPP shares issued during the three months ended June 30, 2017 and 2016. There were an insignificant number of stock options granted during the three months ended June 30, 2017 and 2016.

The assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows:



	Three months ended June 30,
	2017		2016
Risk-free interest rate	1.5% - 1.6%		0.8	%
Expected volatility	17 - 46%		16 - 57%
Weighted-average volatility	28	%	29	%
Expected dividends	None		None

Stock-Based Compensation Expense

Employee stock-based compensation expense recognized during the three months ended June 30, 2016 was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures. We adopted ASU 2016-09 at the beginning of fiscal year 2018 and elected to account for forfeitures as they occur. The adoption resulted in a cumulative-effect adjustment of $8 million, net of tax, decrease to retained earnings.

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



	Three months ended June 30,
	2017		2016
Cost of revenue	$	1	$	1
Research and development	28		27
Marketing and sales	7		7
General and administrative	12		13
Stock-based compensation expense	$	48	$	48

During the three months ended June 30, 2017, we recognized a $10 million deferred income tax benefit related to our stock-based compensation expense. During the three months ended June 30, 2016, we recognized a $9 million deferred income tax benefit related to our stock-based compensation expense.

As of June 30, 2017, our total unrecognized compensation cost related to restricted stock units, market-based restricted stock units, performance-based restricted stock units, and stock options was $477 million and is expected to be recognized over a weighted-average service period of 2.2 years. Of the $477 million of unrecognized compensation cost, $76 million relates to market-based restricted stock units, $44 million relates to performance-based restricted stock units at target, and $1 million relates to stock options.

Stock Options

The following table summarizes our stock option activity for the three months ended June 30, 2017:



	Options (in thousands)		Weighted- Average Exercise Prices		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding as of March 31, 2017	2,377		$	33.35
Granted	1		94.79
Exercised	(736	)	40.56
Forfeited, cancelled or expired	(2	)	47.06
Outstanding as of June 30, 2017	1,640		$	30.15	6.14	$	124
Vested and expected to vest	1,640		$	30.15	6.14	$	124
Exercisable as of June 30, 2017	1,452		$	30.14	6.08	$	110

The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of June 30, 2017, 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 three months ended June 30, 2017:



	Restricted Stock Rights (in thousands)		Weighted- Average Grant Date Fair Values
Outstanding as of March 31, 2017	5,153		$	65.03
Granted	1,691		110.06
Vested	(1,909	)	110.43
Forfeited or cancelled	(126	)	71.07
Outstanding as of June 30, 2017	4,809		$	62.68

Performance-Based Restricted Stock Units

Our performance-based restricted stock units cliff vest after a four-year performance period contingent upon the achievement of pre-determined performance-based milestones and service conditions. If these performance-based milestones are not met but service conditions are met, the performance-based restricted stock units will not vest, in which case any compensation expense we have recognized to date will be reversed. Each quarter, we update our assessment of the probability that the specified performance criteria will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The number of shares of common stock to be issued at vesting will range from zero percent to 200 percent of the target number of performance-based restricted stock units attributable to each performance-based milestone.

The following table summarizes our performance-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the three months ended June 30, 2017:



	Performance- Based Restricted Stock Units (in thousands)	Weighted- Average Grant Date Fair Value
Outstanding as of March 31, 2017	—	$	—
Granted	796	110.51
Forfeited or cancelled	—	—
Outstanding as of June 30, 2017	796	$	110.51

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 issued 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 either a one-year, two-year cumulative and three-year cumulative period, or over a two-year and four-year cumulative period.

The following table summarizes our market-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the three months ended June 30, 2017:



	Market-Based Restricted Stock Units (in thousands)		Weighted- Average Grant Date Fair Value
Outstanding as of March 31, 2017	1,282		$	87.37
Granted	706		140.93
Vested	(430	)	76.27
Forfeited or cancelled	(216	)	91.88
Outstanding as of June 30, 2017	1,342		$	118.35

Stock Repurchase Program

In May 2015, our Board of Directors authorized a program to repurchase up to $1 billion of our common stock. We repurchased approximately 0.3 million shares for approximately $31 million under this program during the three months ended June 30, 2017. We completed repurchases under the May 2015 program in April 2017.

In May 2017, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a new program to repurchase up to $1.2 billion of our common stock. This stock repurchase program expires on May 31, 2019. 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 a specific number of shares under this program and it may be modified, suspended or discontinued at any time. During the three months ended June 30, 2017, we repurchased approximately 1.1 million shares for approximately $119 million under this program. We are actively repurchasing shares under this program.

The following table summarizes total shares repurchased during the three months ended June 30, 2017 and 2016:



	May 2015 Program			May 2017 Program			Total
(in millions)	Shares	Amount		Shares	Amount		Shares	Amount
Three months ended June 30, 2016	1.9	$	129	—	$	—	1.9	$	129
Three months ended June 30, 2017	0.3	$	31	1.1	$	119	1.4	$	150