STOCK-BASED COMPENSATION

Stock-based compensation expense consists primarily of expenses for stock options and RSUs granted to employees and shares issued under the ESPP. The following table summarizes stock-based compensation expense (in thousands):



	Three months ended				Six months ended
	July 3, 2015		June 27, 2014		July 3, 2015		June 27, 2014
Stock-based compensation in:
Cost of revenue	$	422	$	623	$	950	$	1,139
Research and development expense	1,027		1,269		2,175		2,370
Selling, general and administrative expense	2,435		2,669		4,893		4,859
Total stock-based compensation in operating expense	3,462		3,938		7,068		7,229
Total stock-based compensation	$	3,884	$	4,561	$	8,018	$	8,368

The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Stock Options

The Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following weighted average assumptions:



	Three months ended				Six months ended
	July 3, 2015		June 27, 2014		July 3, 2015		June 27, 2014
Expected term (years)	4.60		4.70		4.70		4.70
Volatility	37	%	39	%	38	%	40	%
Risk-free interest rate	1.5	%	1.7	%	1.5	%	1.7	%
Expected dividends	0.0	%	0.0	%	0.0	%	0.0	%

The expected term represents the weighted-average period that the stock options are expected to remain outstanding. The computation of the expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

The weighted-average fair value per share of options granted was $2.44 and $2.70 for the three months ended July 3, 2015 and June 27, 2014, respectively. The weighted-average fair value per share of options granted was $2.63 and $2.35 for the six months ended July 3, 2015 and June 27, 2014, respectively.

The fair value of all stock options vested during the three months ended July 3, 2015 and June 27, 2014 were $0.6 million and $0.7 million, respectively. The fair value of all stock options vested during the six months ended July 3, 2015 and June 27, 2014 were $1.9 million and $2.0 million, respectively.

The total realized tax benefit attributable to stock options exercised in jurisdictions where this expense is deductible for tax purposes was $120,000 for the three months ended April 3, 2015 and $22,000 for the six months ended July 3, 2015. The total realized tax benefit attributable to stock options exercised during the three and six months ended June 27, 2014 were $119,000 and $304,000, respectively.

Restricted Stock Units

The aggregate fair value of all RSUs issued during the three months ended July 3, 2015 and June 27, 2014 were $1.6 million and $2.0 million, respectively. The aggregate fair value of all RSUs issued during the six months ended July 3, 2015 and June 27, 2014 were $7.6 million and $7.4 million, respectively.

Employee Stock Purchase Plan

The value of the stock purchase rights under the ESPP consists of: (1) the 15% discount on the purchase of the stock; (2) 85% of the fair value of the call option; and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model. The weighted average fair value of the Company’s ESPP shares at purchase dates was estimated using the following weighted average assumptions during the six months ended July 3, 2015 and June 27, 2014:



	Purchase Period Ending
	June 30, 2015		June 30, 2014
Expected term (years)	0.50		0.50
Volatility	35	%	28	%
Risk-free interest rate	0.1	%	0.1	%
Expected dividends	0.0	%	0.0	%
Estimated weighted average fair value per share at purchase date	$1.75		$1.70

The expected term represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Unrecognized Stock-Based Compensation

As of July 3, 2015, the Company had approximately $17.8 million of unrecognized stock-based compensation expense related to the unvested portion of its stock options and RSUs that is expected to be recognized over a weighted-average period of approximately 2.0 years.