(14) STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

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 an insignificant number of stock options granted during fiscal years 2018 and 2017.

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



	ESPP Purchase Rights
	Year Ended March 31,
	2018		2017		2016
Risk-free interest rate	1.1 - 2.0%		0.5 - 0.8%		0.3 - 0.6%
Expected volatility	28 - 30%		25 - 32%		32 - 36%
Weighted-average volatility	29	%	27	%	33	%
Expected term	6 - 12 months		6 - 12 months		6 - 12 months
Expected dividends	None		None		None

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



	Year Ended March 31,
	2018		2017		2016
Risk-free interest rate	1.5 - 1.6%		0.8	%	1.0	%
Expected volatility	17 - 46%		16 - 57%		14 - 53%
Weighted-average volatility	28	%	29	%	26	%
Expected dividends	None		None		None

Stock-Based Compensation Expense

Employee stock-based compensation expense recognized during the fiscal years ended March 31, 2017 and 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 Consolidated Statements of Operations (in millions):



	Year Ended March 31,
	2018		2017		2016
Cost of revenue	$	3	$	3	$	2
Research and development	146		109		103
Marketing and sales	32		31		24
General and administrative	61		53		49
Stock-based compensation expense	$	242	$	196	$	178

During the fiscal years ended March 31, 2018, 2017 and 2016, we recognized $29 million, $43 million and $38 million, respectively, of deferred income tax benefit related to our stock-based compensation expense.

As of March 31, 2018, our total unrecognized compensation cost related to restricted stock units, market-based restricted stock units, and performance-based restricted stock units was $504 million and is expected to be recognized over a weighted-average service period of 2.2 years. Of the $504 million of unrecognized compensation cost, $418 million relates to restricted stock units, $49 million relates to market-based restricted stock units, and $37 million relates to performance-based restricted stock units at a 104 percent average vesting target. As of March 31, 2018, there were no unrecognized compensation cost related to stock options as they were fully vested.

Summary of Plans and Plan Activity

Equity Incentive Plans

Our 2000 Equity Incentive Plan, as amended, (the “Equity Plan”) allows us to grant options to purchase our common stock and to grant restricted stock, restricted stock units and stock appreciation rights to our employees, officers, and directors. Pursuant to the Equity Plan, incentive stock options may be granted to employees and officers and non-qualified options may be granted to employees, officers, and directors, at not less than 100 percent of the fair market value on the date of grant.

Approximately 17.7 million options or 12.3 million restricted stock units were available for grant under our Equity Plan as of March 31, 2018.

Stock Options

Options granted under the Equity Plan generally expire ten years from the date of grant and generally vest according to one of the following schedules:


•	35 month vesting with 1/3 vesting after 11, 23 and 35 months;


•	Three-year vesting with 1/3 vesting at the end of each year;


•	50 month vesting with 24% of the shares vesting after 12 months and 2% vesting monthly over the following 38 months.

The following table summarizes our stock option activity for the fiscal year ended March 31, 2018:



	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	5		113.39
Exercised	(764	)	40.30
Forfeited, cancelled or expired	(3	)	41.71
Outstanding as of March 31, 2018	1,615		$	30.28	5.44	$	147
Vested and expected to vest	1,615		$	30.28	5.44	$	147
Exercisable as of March 31, 2018	1,615		$	30.28	5.44	$	147

The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of March 31, 2018, which would have been received by the option holders had all the option holders exercised their options as of that date. The total intrinsic values of stock options exercised during fiscal years 2018, 2017, and 2016 were $43 million, $39 million and $38 million, respectively. We issue new common stock from our authorized shares upon the exercise of stock options.

The following table summarizes outstanding and exercisable stock options as of March 31, 2018:



	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares (in thousands)	Weighted- Average Remaining Contractual Term (in years)	Weighted- Average Exercise Prices		Potential Dilution		Number of Shares (in thousands)	Weighted- Average Exercise Prices		Potential Dilution
$11.53 - $22.42	119	1.41	$	19.80	—	%	119	$	19.80	0.1	%
26.25 - 26.25	750	5.59	26.25		0.3	%	750	26.25		0.2	%
33.60 - 47.06	746	5.94	36.01		0.2	%	746	36.01		0.2	%
$11.53 - $47.06	1,615	5.44	$	30.28	0.5	%	1,615	$	30.28	0.5	%

Potential dilution is computed by dividing the options in the related range of exercise prices by 306 million shares of common stock, which were issued and outstanding as of March 31, 2018.

Restricted Stock Units

We grant restricted stock units under our Equity Plan to employees worldwide. Restricted stock units are unfunded, unsecured rights to receive common stock upon the satisfaction of certain vesting criteria. Upon vesting, a number of shares of common stock equivalent the number of restricted stock units is typically issued net of required tax withholding requirements, if any. Restricted stock units are subject to forfeiture and transfer restrictions. Vesting for restricted stock units is based on the holders’ continued employment with us through each applicable vest date. If the vesting conditions are not met, unvested restricted stock units will be forfeited.

Generally, our restricted stock units vest according to one of the following vesting schedules:


•	One-year vesting with 100% cliff vesting at the end of one year;


•	35 month vesting with 1/3 vesting after 11, 23 and 35 months;


•	Three-year vesting with 1/3 vesting at the end of each year;


•	Four-year vesting with 1/2 and 1/2 vesting after 24 and 48 months or;


•	Four-year vesting with 1/4 vesting at the end of each year.

Each restricted stock unit granted reduces the number of shares available for grant by 1.43 shares under our Equity Plan. The following table summarizes our restricted stock units activity, excluding market-based restricted stock unit activity which is discussed below, for the fiscal year ended March 31, 2018:



	Restricted Stock Units (in thousands)		Weighted- Average Grant Date Fair Values
Outstanding as of March 31, 2017	5,153		$	65.03
Granted	3,841		110.05
Vested	(2,581	)	59.49
Forfeited or cancelled	(465	)	80.97
Outstanding as of March 31, 2018	5,948		$	94.57

The grant date fair value of restricted stock units is based on the quoted market price of our common stock on the date of grant. The weighted-average grant date fair values of restricted stock units granted during fiscal years 2018, 2017, and 2016 were $110.05, $76.60 and $64.40 respectively. The fair values of restricted stock units that vested during fiscal years 2018, 2017, and 2016 were $289 million, $320 million and $372 million, respectively.

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 based on our non-GAAP net revenue and free cash flow as well as 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 non-GAAP net revenue and free cash flow performance milestones will be achieved. We amortize the fair values of performance-based restricted stock units over the requisite service period. The performance-based restricted stock units contain threshold, target and maximum milestones for each of non-GAAP net revenue and free cash flow. 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 based on the company’s performance as compared to these threshold, target and maximum performance-based milestones. Each performance-based milestone is weighted evenly where 50 percent of the total performance-based restricted stock units that vest will be determined based on non-GAAP net revenue and the other 50 percent will be determined based on free cash flow. The number of shares that vest based on each performance-based milestone is independent from the other.

The following table summarizes our performance-based restricted stock unit activity, presented with the maximum number of shares that could potentially vest, for the fiscal year ended March 31, 2018:



	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 March 31, 2018	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, 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 year ended March 31, 2018:



	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 March 31, 2018	1,342		$	118.35

The weighted-average grant date fair values of market-based restricted stock units granted during fiscal years 2018, 2017, and 2016 were $140.93, $98.04, and $79.81, respectively. The fair values of market-based restricted stock units that vested during fiscal years 2018, 2017, and 2016 were $48 million, $42 million, and $47 million, respectively.

ESPP

Pursuant to our ESPP, eligible employees may authorize payroll deductions of between 2 percent and 10 percent of their compensation to purchase shares of common stock at 85 percent of the lower of the market price of our common stock on the date of commencement of the applicable offering period or on the last day of each six-month purchase period.

The following table summarizes our ESPP activity for fiscal years ended March 31, 2018, 2017 and 2016:



	Shares Issued (in millions)	Exercise Prices for Purchase Rights	Weighted-Average Fair Values of Purchase Rights
Fiscal Year 2016	0.9	$32.16 - $54.78	$	12.97
Fiscal Year 2017	0.7	$54.60 - $67.56	$	17.93
Fiscal Year 2018	0.6	$67.56 - $99.82	$	21.57

The fair values were estimated on the date of grant using the Black-Scholes valuation model. We issue new common stock out of the ESPP’s pool of authorized shares. As of March 31, 2018, 6.8 million shares were available for grant under our ESPP.

Deferred Compensation Plan

We have a Deferred Compensation Plan (“DCP”) for the benefit of a select group of management or highly compensated employees and directors, which is unfunded and intended to be a plan that is not qualified within the meaning of section 401(a) of the Internal Revenue Code. The DCP permits the deferral of the annual base salary and/or director cash compensation up to a maximum amount. The deferrals are held in a separate trust, which has been established by us to administer the DCP. The trust is a grantor trust and the specific terms of the trust agreement provide that the assets of the trust are available to satisfy the claims of general creditors in the event of our insolvency. The assets held by the trust are classified as trading securities and are held at fair value on our Consolidated Balance Sheets. The assets and liabilities of the DCP are presented in other assets and other liabilities on our Consolidated Balance Sheets, respectively, with changes in the fair value of the assets and in the deferred compensation liability recognized as compensation expense. The estimated fair value of the assets was $10 million and $8 million as of March 31, 2018 and 2017, respectively. As of March 31, 2018 and 2017, $11 million and $9 million were recorded, respectively, to recognize undistributed deferred compensation due to employees.

401(k) Plan, Registered Retirement Savings Plan and ITP Plan

We have a 401(k) plan covering substantially all of our U.S. employees, a Registered Retirement Savings Plan covering substantially all of our Canadian employees, and an ITP pension plan covering substantially all our Swedish employees. These plans permit us to make discretionary contributions to employees’ accounts based on our financial performance. We contributed an aggregate of $31 million, $28 million and $27 million to these plans in fiscal years 2018, 2017, and 2016, respectively.

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. We have repurchased approximately 9.2 million shares for approximately $394 million under this program. This program was superseded and replaced by the stock repurchase program approved in May 2015.

In May 2015, our Board of Directors authorized a two-year program to repurchase up to $1 billion of our common stock. We repurchased approximately 0.3 million, 6.5 million and 6.9 million shares for approximately $31 million, $508 million and $461 million under this program, respectively, during the fiscal years ended March 31, 2018, 2017 and 2016. We completed repurchases under the May 2015 program in April 2017.

In February 2016, our Board of Directors authorized a $500 million stock repurchase program. This program was incremental to the two-year $1 billion stock repurchase program announced in May 2015. During the quarter ended March 31, 2016, we completed repurchases of approximately 7.8 million shares for approximately $500 million under the February 2016 program.

In May 2017, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $1.2 billion of our common stock. During the fiscal year ended March 31, 2018, we repurchased approximately 5.0 million shares for approximately $570 million under this program. This program was superseded and replaced by a new stock repurchase program approved in May 2018.

In May 2018, a Special Committee of our Board of Directors, on behalf of the full Board of Directors, authorized a program to repurchase up to $2.4 billion of our common stock. This stock repurchase program supersedes and replaces the May 2017 program, and expires on May 31, 2020. 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. We are actively repurchasing shares under this program.

The following table summarizes total shares repurchased during fiscal years 2018, 2017, and 2016:



	May 2014 Program			May 2015 Program			February 2016 Program			May 2017 Program			Total
(In millions)	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Fiscal Year 2016	1.0	$	57	6.9	$	461	7.8	$	500	—	$	—	15.7	$	1,018
Fiscal Year 2017	—	$	—	6.5	$	508	—	$	—	—	$	—	6.5	$	508
Fiscal Year 2018	—	$	—	0.3	$	31	—	$	—	5.0	$	570	5.3	$	601