Equity Incentive Plan

Our 2000 Equity Incentive Plan (2000 Plan) provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units and stock appreciation rights to employees, directors, officers and consultants. We award restricted stock units as the principal equity incentive awards, including certain performance-based awards that are earned based on achieving performance criteria established by the Compensation Committee of our Board of Directors on or prior to the grant date. Each restricted stock unit represents the contingent right to receive one share of our common stock.

The fair value of restricted stock units granted in 2017, 2016 and 2015 was based on the fair market value of our stock on the date of grant. The weighted average fair value per share of restricted stock units granted in 2017, 2016 and 2015 was $51.27, $37.25 and $38.19, respectively. In 2017, the weighted average fair value per share of restricted stock was increased by $2.27 by the additional shares earned for the 2016 TSR grant upon measurement on the vest date in 2017. Pre-vesting forfeiture rates for purposes of determining stock-based compensation for 2017 and 2016 were estimated by us to be 0% for directors and executive officers, 6% to 8% for vice president-level employees and 11% for all other employees. Pre-vesting forfeiture rates for purposes of determining stock-based compensation for 2015 were estimated by us to be 0% for directors and executive officers, 2% to 4% for vice president-level employees and 7% for all other employees.

The following table shows total stock-based compensation expense recorded from our stock-based awards as reflected in our Consolidated Statements of Operations:



	Year ended September 30,
	2017		2016		2015
	(in thousands)
Cost of license subscription revenue	$	1,379	$	805	$	521
Cost of support revenue	5,116		4,593		3,775
Cost of professional services revenue	6,116		5,393		5,871
Sales and marketing	15,373		14,659		14,189
Research and development	13,968		10,174		11,623
General and administrative	34,756		30,372		14,203
Total stock-based compensation expense	$	76,708	$	65,996	$	50,182

Stock-based compensation expense in 2017 and 2016 includes $3.2 million and $0.4 million, respectively, related to our employee stock purchase plan (ESPP). The stock-based compensation expense in 2016 included $10 million of expense related to modifications of certain performance-based RSUs previously granted under our long-term incentive programs. The Compensation Committee of our Board of Directors amended these equity awards due to the impact of changes in our business model and strategy and foreign currency on our financial results.

As of September 30, 2017, total unrecognized compensation cost related to unvested restricted stock units expected to vest was approximately $84.5 million and the weighted average remaining recognition period for unvested awards was 17 months.

As of September 30, 2017, 3.7 million shares of common stock were available for grant under the 2000 Plan and 3.5 million shares of common stock were reserved for issuance upon the exercise of stock options and vesting of restricted stock units granted and outstanding.

Our ESPP, initiated in the fourth quarter of 2016, allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to any other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period.



	Shares		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value as of September 30, 2017
Restricted stock unit activity for the year ended September 30, 2017	(in thousands except grant date fair value data)
Balance of nonvested outstanding restricted stock units October 1, 2016	3,776		$	37.30
Granted	1,946		$	51.27
Vested	(1,586	)	$	36.05
Forfeited or not earned	(649	)	$	37.83
Balance of nonvested outstanding restricted stock units September 30, 2017	3,487		$	45.57	$	196,230



	Restricted Stock Units
Restricted stock unit grants	TSR Units (1)	Performance-based RSUs (2)	Service-based RSUs (3)
	(Number of Units in thousands)
Year ended September 30, 2017	358	325	1,263


(1)	The TSR units were granted to our executive officers pursuant to the terms described below.

(2) The performance-based RSUs were issued to employees, our executive officers, our directors and a consultant. Executive officers may earn up to one or, for our CEO, two times the number of time-based RSUs (up to a maximum of 325 thousand shares) if certain performance conditions are met. Of the service-based RSUs, approximately 108 thousand shares will vest in one installment on or about the anniversary of the date of grant. Approximately 217 thousand shares will vest in two substantially equal annual installments on or about the anniversary of the date of grant. All other service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant. The performance-based RSUs will vest in three substantially equal installments on the later of November 15, 2017, November 15, 2018 and November 15, 2019, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved.

(3) The service-based RSUs were granted to employees, our executive officers and our directors. All service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.

In the first quarter of 2017, we granted the target performance-based TSR units ("target RSUs") shown in the table above to 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, 2017, 2018 and 2019, respectively. The shares earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of target RSUs (up to a maximum of 499 thousand 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 will vest for the measurement period. TSR units not earned in either of the first two measurement periods are eligible to be earned in the third measurement period.

The weighted average fair value of the TSR units was $68.02 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:



Average volatility of peer group	29.3	%
Risk free interest rate	0.99	%
Dividend yield	—	%

Until July 2005, we generally granted stock options. For those options, the option exercise price was typically the fair market value at the date of grant, and they generally vested over four years and expired ten years from the date of grant. There were no options outstanding and exercisable at September 30, 2017 and 2016.



	Year ended September 30,
	2017		2016		2015
Value of stock option and stock-based award activity	(in thousands)
Total intrinsic value of stock options exercised	$	—	$	88	$	182
Total fair value of restricted stock unit awards vested	$	78,573	$	63,655	$	84,189

In 2017, shares issued upon vesting of restricted stock units were net of 0.5 million shares retained by us to cover employee tax withholdings of $26.7 million. In 2016, shares issued upon vesting of restricted stock units were net of 0.6 million shares retained by us to cover employee tax withholdings of $20.9 million. In 2015, shares issued upon vesting of restricted stock and restricted stock units were net of 0.8 million shares retained by us to cover employee tax withholdings of $29.2 million.