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 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.

Beginning in the first quarter of 2018, we account for forfeitures as they occur, rather than estimate expected forfeitures.

Our employee stock purchase plan (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 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.



Restricted stock unit activity for the nine months ended June 30, 2018	Shares		Weighted Average Grant Date Fair Value (Per Share)
	(in thousands)
Balance of outstanding restricted stock units October 1, 2017	3,487		$	45.57
Granted (1)	2,167		$	75.99
Vested	(1,804	)	$	43.94
Forfeited or not earned	(531	)	$	50.95
Balance of outstanding restricted stock units June 30, 2018	3,319		$	65.48

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(1) Restricted stock granted includes 184,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2018.



	Restricted Stock Units
Grant Period	Performance-based RSUs (1)	Service-based RSUs (2)
	(Number of Units in thousands)
First nine months of 2018	961	1,022

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(1)

Substantially all the performance-based RSUs were granted to our executive officers. Approximately 189,000 shares are eligible to vest based upon annual performance measures, measured over a three-year period. RSUs not earned for a period may be earned in the third period. An additional 250,000 shares are eligible to vest based upon a 2018 performance measure. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2018, November 15, 2019 and November 15, 2020, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. An additional 500,000 shares are eligible to vest based upon annual performance measures, measured over a three-year period in fiscal years 2021, 2022 and 2023. RSUs not earned for a period may be earned in the third period.


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

Compensation expense recorded for our stock-based awards was classified in our Consolidated Statements of Operations as follows:



	Three months ended				Nine months ended
	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
	(in thousands)
Cost of license and subscription revenue	$	421	$	347	$	1,242	$	954
Cost of support revenue	527		1,139		2,025		3,638
Cost of professional services revenue	1,471		1,505		4,846		4,500
Sales and marketing	4,910		3,296		14,827		11,047
Research and development	3,283		2,805		9,626		9,753
General and administrative	6,046		7,482		19,449		26,247
Total stock-based compensation expense	$	16,658	$	16,574	$	52,015	$	56,139

Stock-based compensation expense includes $1.1 million and $3.2 million in the third quarter and first nine months of 2018, respectively, and $0.9 million and $2.2 million in the third quarter and first nine months of 2017, respectively, related to the ESPP.