Stock-Based Compensation
 3 Months Ended
Mar. 31, 2015
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation
Stock-Based Compensation
The Company grants stock options, restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”) under its 2009 Equity Incentive Plan. Eligible employees may elect to purchase shares of common stock through the Employee Stock Purchase Plan ("ESPP"). The fair value of each option award and ESPP share is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the assumptions in the following table. The Company has consistently used a blend of average historical and market-based implied volatilities for calculating the expected volatilities for employee stock options, and uses market-based implied volatilities for its ESPP. The expected term of employee stock options granted is derived from historical exercise patterns of the options, and the expected term of ESPP is based on the contractual terms. The expected term of options granted to employees is derived from the historical option exercises, post-vesting cancellations, and estimates concerning future exercises and cancellations for vested and unvested options that remain outstanding. The risk-free interest rate for the expected term of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. The Company recognizes its stock-based compensation related to options using a straight-line method over the vesting term of the awards. The Company recognizes its stock-based compensation related to ESPP using a straight-line method over the offering period, which is six months.
The fair value of RSUs is the grant date closing price of our common stock. Beginning in the first quarter of 2015, the Company granted two types of PRSUs. The fair value of PRSUs, with service and performance conditions, is the grant date closing price of our common stock. The grant date fair value of the PRSUs requiring the satisfaction of service, performance, and market conditions was determined by using a Monte Carlo simulation model, which utilized multiple input variables that determined the probability of satisfying the market condition requirements. The Company recognizes expense related to RSUs using a straight-line method over the vesting term of the awards. The Company recognizes expense for PRSUs, with service and performance conditions, based on the probability of achieving the performance criteria, as defined in the PRSU agreements. The Company recognizes expense for PRSUs with service, performance, and market conditions based on the probability of achieving the performance conditions as long as the requisite service is rendered, even if the market conditions are not met. PRSUs are expensed using the graded vesting attribution method over the requisite service period.
The Company records stock-based compensation for options, RSUs and PRSUs granted net of estimated forfeiture rates. ASC 718, Stock Compensation, requires the Company to estimate forfeiture rates at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical forfeitures to estimate its future forfeiture rates.
The fair value of the Company’s stock-based awards was estimated based on the following assumptions:
 
Three Months Ended
March 31,
 
2015
 
2014
Option grants:
 
 
 
Expected volatility
31
%
 
37 - 40%

Expected dividends
—

 
—

Expected term of options (in years)
3.5

 
3.5

Risk-free interest rate
1.1
%
 
1.0
%
ESPP: (i)
 
 
 
Expected volatility
29
%
 
36
%
Expected dividends
—

 
—

Expected term of ESPP (in years)
0.5

 
0.5

Risk-free interest rate
0.1
%
 
0.1
%
PRSUs with market conditions:
 
 
 
Expected volatility
30% - 39%

 
—

Expected dividends
—

 
—

Risk-free interest rate
1.0
%
 
—

____________________
(i)
ESPP purchases are scheduled for the last day of January and July of each year.
The allocations of the stock-based compensation, net of estimated income tax benefit, for the three months ended March 31, 2015 and 2014 are as follows (in thousands):
 
Three Months Ended
March 31,
 
2015
 
2014
Cost of service revenues
$
1,539

 
$
1,464

Research and development
5,060

 
4,662

Sales and marketing
4,769

 
4,706

General and administrative
3,722

 
3,414

Total stock-based compensation
15,090

 
14,246

Estimated tax benefit of stock-based compensation
(4,040
)
 
(3,862
)
Total stock-based compensation, net of estimated tax benefit
$
11,050

 
$
10,384


Stock Option Activity
A summary of stock option activity through March 31, 2015 is presented below (in thousands, except per share amounts):
 
 
 
 
 
 
 
Number of
Shares
 
Weighted-
Average
Exercise Price
Per Share
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2014
7,186

 
$
35.82

 
4.25
 
$
31,514

Granted
464

 
$
42.50

 
 
 
 
Exercised
(601
)
 
$
22.96

 
 
 
 
Forfeited or expired
(208
)
 
$
36.17

 
 
 
 
Outstanding at March 31, 2015
6,841

 
$
37.40

 
4.24
 
$
48,057

Exercisable at March 31, 2015
3,950

 
$
36.99

 
3.41
 
$
30,817


Restricted Stock Unit Activity
A summary of RSU activity, excluding PRSUs, through March 31, 2015 is presented below (in thousands, except per share amounts):
 
 
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Outstanding at December 31, 2014
2,513

 
—

Awarded
835

 
$
42.50

Released
(167
)
 
$
40.30

Forfeited
(129
)
 
$
37.60

Outstanding at March 31, 2015
3,052

 
—


Performance-Based Restricted Stock Unit Activity
During the first quarter of 2015, the Company granted approximately 237,000 target PRSUs.
•
Approximately 149,000 of these PRSUs have a performance period that is the 2015 fiscal year. If certain performance goals are met, PRSUs would become eligible to vest, and vest ratably over four years on the annual anniversary dates of the vesting commencement date, contingent upon the recipient’s continued service to the company. Certain participants have the ability to receive up to 125% of the target number of shares originally granted. The Compensation Committee of the Board of Directors will certify actual performance achievement for these PRSUs in the first quarter of 2016. The weighted-average grant date fair value of these PRSUs was $43.06 per share.
•
Approximately 88,000 of these PRSUs have a performance period that is the three year period beginning with January 1, 2015 through December 31, 2017 with certain revenue based performance goals and the achievement of an objective relative total stockholder return against other companies in the S&P Software & Services Select Index measured over a three-year performance period. Participants have the ability to receive up to 188% of the target number of shares originally granted. The Compensation Committee of the Board of Directors will certify actual performance achievement for these PRSUs in the first quarter of 2018, after which they will vest immediately in full. The weighted-average grant date fair value of 2015 PRSUs was $46.93 per share, which was determined using a Monte Carlo simulation model.
During the first quarter of 2014, the Company granted approximately 223,000 target PRSUs. The performance period for the PRSUs granted in 2014 was the 2014 fiscal year. In the first quarter of 2015, the Compensation Committee of the Board of Directors certified actual performance achievement for PRSUs granted in 2014, and as a result, 138,000 shares became eligible to vest. The achieved PRSUs vest ratably over two or four years on the annual anniversary dates of the grant, contingent upon the recipient’s continued service to the Company. Certain participants had the ability to receive up to 125% to 150% of the target number of shares originally granted. The weighted-average grant date fair value of PRSUs granted in 2014 was $38.25 per share.
A summary of PRSU activity based upon PRSUs granted in 2013 and 2014, certified and actually achieved through the three months ended March 31, 2015 is presented below (in thousands):
 
 Number of
Shares
Outstanding at December 31, 2014
306

Achieved
138

Released
(136
)
Forfeited
(20
)
Outstanding at March 31, 2015
288

The fair value of PRSUs released during the three months ended March 31, 2015 was approximately $5.1 million.
A summary of PRSU activity through the three months ended March 31, 2015 for awards that have not been certified by the Compensation Committee of the Board of Directors as achieved is presented below (in thousands):
 
 Number of
Shares
Outstanding at December 31, 2014
—

Granted
237

Forfeited
(2
)
Outstanding at March 31, 2015
235


As of March 31, 2015, there were approximately 523,000 unvested PRSUs with a fair value of $21.3 million.