12. Stock-based Compensation

We account for stock-based payment awards in accordance with ASC 718, Stock Compensation, which requires the measurement and recognition of compensation expense for all equity awards granted to our employees and directors, including RSUs, ESPP purchase rights, and employee stock options related to all stock-based compensation plans based on the fair value of such awards on the date of grant. We amortize stock-based compensation cost on a graded vesting basis over the vesting period reduced by actual forfeitures, after assessing the probability of achieving the requisite performance criteria with respect to performance-based awards. Stock-based compensation cost is recognized over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards.

Stock-based compensation expense related to stock options, ESPP purchase rights, and RSUs during the three and nine months ended September 30, 2017 and 2016 is summarized as follows (in thousands):


	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Stock-based compensation expense by type of award:
RSUs	$	3,545		$	7,979		$	18,875		$	24,931
ESPP purchase rights		1,103			574			3,666			1,932
Employee stock options		—			—			—			79

Total stock-based compensation		4,648			8,553			22,541			26,942
Income tax benefit		(1,525	)		(3,649	)		(6,929	)		(7,895	)

Stock-based compensation expense, net of tax	$	3,123		$	4,904		$	15,612		$	19,047

Valuation Assumptions for Stock Options and ESPP Purchase Rights

We use the Black-Scholes-Merton (“BSM”) option pricing model to value stock-based compensation for all equity awards, except market-based awards, which are valued using the Monte Carlo valuation model.

The BSM model determines the fair value of stock-based payment awards based on the stock price on the date of grant and is affected by assumptions regarding highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, expected term, interest rates, and actual and projected employee stock option exercise behavior. Expected volatility is based on the historical volatility of our stock over a preceding period commensurate with the expected term of the option. The expected term is based upon management’s consideration of the historical life, vesting period, and contractual period of the options granted. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not pay dividends and have no current plans to do so in the future.

Stock options were not granted during the three and nine months ended September 30, 2017 and 2016. The estimated weighted average fair value per share of ESPP purchase rights issued and the underlying weighted average assumptions for the three and nine months ended September 30, 2017 and 2016 are as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Weighted average fair value per share	$	13.14		$	12.00		$	12.09		$	10.69
Expected volatility		25% - 28	%		26% - 32	%		24% - 28	%		22% - 32	%
Risk-free interest rate		1.2% - 1.3	%		0.4% - 0.7	%		0.7% - 1.3	%		0.4% - 0.8	%
Expected term (in years)		0.5 - 2.0			0.5 - 2.0			0.5 - 2.0			0.5 - 2.0

Stock options outstanding and exercisable, including performance-based and market-based options, as of September 30, 2017, and activity during the nine months ended September 30, 2017 are summarized below (in thousands, except weighted average exercise price and remaining contractual term):


	Shares outstanding			Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value
Options outstanding at January 1, 2017		315		$	13.86
Options exercised		(140	)		12.22

Options outstanding at September 30, 2017		175		$	15.18		1.32	$	4,812

Options vested and expected to vest at September 30, 2017		175		$	15.18		1.32	$	4,812

Options exercisable at September 30, 2017		175		$	15.18		1.32	$	4,812

Aggregate intrinsic value for stock options represents the difference between the closing price per share of our common stock on the last trading day of the fiscal period and the option exercise price multiplied by the number of in-the-money stock options outstanding, vested and expected to vest, and exercisable at September 30, 2017.

Non-vested RSUs as of September 30, 2017, and activity during the nine months ended September 30, 2017 are summarized below (shares in thousands):


	Time-based					Performance-based					Market-based				Total
	Shares			Weighted average grant date fair value		Shares			Weighted average grant date fair value		Shares		Weighted average grant date fair value		Shares			Weighted average grant date fair value
Non-vested at January 1, 2017		795		$	43.79		1,265		$	42.64		23	$	33.16		2,083		$	43.34
Granted		120			45.98		371			46.93		—		—		491			46.70
Vested		(417	)		43.88		(276	)		40.83		—		—		(693	)		42.66
Forfeited		(49	)		43.72		(437	)		41.29		—		—		(486	)		41.53

Non-vested at September 30, 2017		449		$	44.30		923		$	45.55		23	$	33.16		1,395		$	45.49

Vested RSUs

Performance-based RSUs that vested based on financial results are included in “Vested RSUs” in the table above in the period that the performance and related service criteria were met. The grant date fair value of RSUs vested during the nine months ended September 30, 2017 was $29.6 million. The aggregate intrinsic value at September 30, 2017 for RSUs expected to vest was $34.1 million and the remaining weighted average vesting period was 1.0 year. Aggregate intrinsic value for RSUs vested and expected to vest represents the closing price per share of our common stock on the last trading day of the fiscal period, multiplied by the number of RSUs vested and expected to vest as of September 30, 2017. RSUs expected to vest represent time-based RSUs unvested and outstanding at September 30, 2017, and performance-based RSUs for which the requisite service period has not been rendered, but are expected to vest based on the achievement of performance conditions.

Performance-based and Market-based RSUs and Stock Options

Performance-based stock options, market-based RSUs, and market-based stock options were not granted during the nine months ended September 30, 2017 and 2016. We use the BSM option pricing model to value performance-based RSUs. The weighted average grant date fair value per share of performance-based RSUs granted and the assumptions used to estimate grant date fair value during the nine months ended September 30, 2017 and 2016 are as follows:


	Performance-based
	RSUs
	Short-term		Long-term
*Nine months ended September 30, 2017 Grants*
Grant date fair value per share	$	47.23	$	45.96
Service period (years)		1.0		2.0 - 3.0

*Nine months ended September 30, 2016 Grants*
Grant date fair value per share	$	39.79	$	45.62
Service period (years)		1.0		2.0 - 3.0

Our performance-based RSUs generally vest when specified performance criteria are met based on bookings, revenue, cash provided by operating activities, non-GAAP operating income, non-GAAP earnings per share, revenue growth compared to market comparables, non-GAAP earnings per share growth compared to cash flow from operating activities growth, or other targets during the service period; otherwise, they are forfeited. Non-GAAP operating income is defined as operating income determined in accordance with GAAP, adjusted to remove the impact of certain expenses and gains. Non-GAAP earnings per share is defined as net income determined in accordance with GAAP, adjusted to remove the impact of certain expenses and gains, and the related tax effects, divided by the weighted average number of common shares and dilutive potential common shares outstanding during the period as more fully defined in Note 2 – Earnings Per Share of the Notes to Condensed Consolidated Financial Statements.

The grant date fair value per share determined in accordance with the BSM valuation model is being amortized over the service period of the performance-based awards. The probability of achieving the awards was determined based on review of the actual results achieved thus far by each business unit compared with the operating plan during the pertinent service period as well as the overall strength of the business unit. Stock-based compensation expense was adjusted based on this probability assessment. As actual results are achieved during the service period, the probability assessment is updated and stock-based compensation expense adjusted accordingly.

Market-based awards that were granted in prior periods vest when our average closing stock price exceeds defined multiples of the closing stock price for 90 consecutive trading days. If these multiples were not achieved by the expiration date, the awards are forfeited. The grant date fair value is being amortized over the average derived service period of the awards. The average derived service period and total fair value were determined using a Monte Carlo valuation model based on our assumptions, which include a risk-free interest rate and implied volatility.

2017 Equity Incentive Plan

Our stockholders approved the 2017 Equity Incentive Plan (“2017 Plan”) on June 7, 2017, which includes:

•

1.2 million shares of our common stock reserved for issuance pursuant to such plan;

•

1,593,660 common stock shares that were available for future grants under the 2009 Equity Incentive Award Plan (“Prior Plan”) immediately prior to termination of authority to grant new awards under the Prior Plan on June 7, 2017;

•

shares subject to stock options granted under the Prior Plan and outstanding as of June 7, 2017, which expire, or for any reason are cancelled or terminated, after that date without being exercised; and

•

shares subject to restricted stock unit awards granted under the Prior Plan that are outstanding and unvested as of June 7, 2017 which are forfeited, terminated, cancelled, or otherwise reacquired after that date without having become vested.

No additional grants will be made under the Prior Plan. The 2017 Plan replaces the Prior Plan and will be used to help attract, retain and motivate employees, consultants, and directors.