Stock-based Compensation

We measure the cost of employee services received in exchange for restricted stock unit (RSU) awards based on the fair value of RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, RSUs and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including certain performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.

Our equity incentive plans are described more fully in Note K to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.



Restricted stock unit activity for the three months ended January 3, 2015	Shares		Weighted Average Grant Date Fair Value (Per Share)
	(in thousands)
Balance of outstanding restricted stock units October 1, 2014	4,379		$	26.87
Granted	1,165		$	38.54
Vested	(1,543	)	$	23.53
Forfeited or not earned	(135	)	$	27.99
Balance of outstanding restricted stock units January 3, 2015	3,866		$	31.26



	Restricted Stock Units
Grant Period	Performance-based (1)	Service-based (2)

	(Number of Units in thousands)
First three months of 2015	279	886

_________________


(1)	The performance-based RSUs were granted to employees pursuant to the terms described below.


(2)	The service-based RSUs were issued to employees, including our executive officers. Of these RSUs, approximately 110,000 will vest one year from the date of grant. Substantially all other service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.

In November 2014, we granted the target performance-based restricted stock units ("target RSUs") shown in the table above to senior level employees, including our executive officers. These RSUs are eligible to vest based upon our total shareholder return relative to a peer group (the “TSR units”), measured annually over a three-year period. The number of TSR units to vest over the three year period will be determined based on the performance of PTC stock relative to the stock performance of an index of PTC peer companies established as of the grant date, as determined at the end of three measurement periods ending on September 30, 2015, 2016 and 2017, respectively. The shares earned for each period will vest on November 15 following each measurement period, up to a maximum of two times or one and one half times, as applicable, the number of target RSUs (up to a maximum of 522,000 shares). No vesting will occur in a period unless an annual threshold requirement is achieved. The employee must remain employed by PTC through the applicable vest date for any RSUs to vest. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the target RSUs shall vest for the measurement period. TSR units not earned in the first two year measurement periods are eligible to be earned in the third measurement period.

The weighted average fair value of the TSR units was $42.92 per target RSU on the grant date. The fair value of the TSR units was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate.

The significant assumptions used in the Monte Carlo simulation model were as follows:



	November 2014 Grant
Average volatility of peer group	30.4	%
Risk free interest rate	0.95	%
Dividend yield	—	%

Compensation expense recorded for our stock-based awards was classified in our consolidated statements of operations as follows:



	Three months ended
	January 3, 2015		December 28, 2013
	(in thousands)
Cost of license and subscription solutions revenue	$	142	$	65
Cost of support revenue	776		924
Cost of professional services revenue	1,689		1,537
Sales and marketing	2,872		2,499
Research and development	3,086		2,689
General and administrative	2,677		5,050
Total stock-based compensation expense	$	11,242	$	12,764