Note 8—Stock-Based Compensation

Stock-Based Compensation Expense

Stock-based compensation expense related to stock options, stock appreciation rights (“SARs”), employee stock purchase plan (“ESPP”) shares, and restricted stock units (“RSUs”) was recognized in the Company’s condensed consolidated statements of operations for the periods presented as follows (in thousands):

	Three Months Ended June 30						Six Months Ended June 30
	2014			2013			2014			2013
Statement of operations classification
Cost of recurring revenues	$	834		$	1,306		$	1,676		$	1,794
Cost of non-recurring revenues	354			1,730			729			2,112
Total cost of revenues	1,188			3,036			2,405			3,906

Sales and marketing	2,661			6,523			5,296			8,046
Product development	1,923			3,532			3,848			4,858
General and administrative	1,912			14,098			3,763			15,396
Total operating expenses	6,496			24,153			12,907			28,300

Total stock-based employee compensation expense	7,684			27,189			15,312			32,206

Tax effect on stock-based employee compensation expense	(2,981		)	(11,116		)	(5,908		)	(13,162		)

Effect on net income from continuing operations, net of tax	$	4,703		$	16,073		$	9,404		$	19,044

As of June 30, 2014, total compensation cost related to unvested awards not yet recognized under all equity compensation plans was $57.3 million and is expected to be recognized over the remaining vesting period of each grant, with a weighted average remaining period of 2.6 years for the group as a whole.

Valuation Assumptions

Advent uses the Black-Scholes option pricing model and the straight-line attribution approach to determine the grant date fair value of stock options, SARs and the ESPP. The fair value of RSUs is equal to the Company’s closing stock price on the date of grant.

The following Black-Scholes option pricing model assumptions were used for stock options and SARs granted in the following periods:

	Three Months Ended June 30		Six Months Ended June 30
	2014	2013	2014	2013
Stock Options & SARs
Risk-free interest rate	1.2% - 1.7%	0.5% - 1.0%	1.2% - 1.7%	0.5% - 1.0%
Volatility	32.8% - 34.2%	33.4% - 38.5%	32.8% - 35.1%	33.4% - 38.8%
Expected life (in years)	3.69 - 4.85	3.94 - 5.06	3.69 - 4.85	3.94 - 5.06
Expected dividend yield	0% - 1.8%	0%	0% - 1.8%	0%

Employee Stock Purchase Plan
Risk-free interest rate	0.06%	0.1%	0.06%	0.1%
Volatility	32.1%	31.8%	32.1%	31.8%
Expected life (in years)	0.5	0.5	0.5	0.5
Expected dividend yield	1.7%	0%	1.7%	0%

Volatility for the periods presented was calculated using an equally weighted average of the Company’s historical and implied volatility of its common stock. The Company believes that this blended calculation of volatility is the most appropriate indicator of expected volatility and best reflects expected market conditions.

Expected life for the periods presented was determined based on the Company’s historical experience of similar awards, giving consideration to the contractual terms or offering periods, vesting schedules and expectations of future employee behavior.

Risk-free interest rate for the periods presented was based on the U.S. Treasury yield curve in effect at the date of grant for periods corresponding with the expected life.

The expected dividend yield for the three and six months ended June 30, 2014 reflects the quarterly cash dividend declared on April 28, 2014 and was calculated by annualizing the most recent dividend declared and dividing the result by the Company’s closing stock price on the date of grant. The dividend yield assumption for grants prior to April 28, 2014 was based on the Company’s history of not paying regular dividends and the future expectation of no recurring dividend payouts at the time of grant.

Equity Award Activity

The Company’s stock option and SAR activity for the six months ended June 30, 2014 was as follows:

					Weighted
			Weighted		Average	Aggregate
	Number of		Average		Remaining	Intrinsic
	Shares		Exercise		Contractual Life	Value
	(in thousands)		Price		(in years)	(in thousands)

Outstanding at December 31, 2013	5,590		$	15.05
Options & SARs granted	683			29.02
Options & SARs exercised	(555	)		13.33
Options & SARs canceled	(119	)		19.75
Outstanding at June 30, 2014	5,599		$	16.82	6.76	$	88,246
Exercisable at June 30, 2014	2,827		$	13.09	4.92	$	55,067

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing stock price of $32.57 on June 30, 2014 for options and SARs that were in-the-money as of that date.

The weighted average grant date fair value of options and SARs granted, total intrinsic value of options and SARs exercised and cash received from options exercised during the periods presented were as follows (in thousands, except weighted average grant date fair value):

	Six Months Ended June 30
	2014		2013
Options and SARs
Weighted average grant date fair value	$	7.44	$	10.45
Total intrinsic value of awards exercised	$	9,939	$	26,518

Options
Cash received from exercises	$	2,141	$	16,212

The Company settles exercised stock options and SARs with newly issued common shares.

The Company’s RSU activity for the six months ended June 30, 2014 was as follows:

			Weighted
	Number of		Average
	Shares		Grant Date
	(in thousands)		Fair Value

Outstanding and unvested at December 31, 2013	1,159		$	20.16
RSUs granted	745			30.13
RSUs vested	(305	)		28.89
RSUs canceled	(63	)		27.46
Outstanding and unvested at June 30, 2014	1,536		$	22.98

In March 2014, the Company granted approximately 334,000 RSUs with performance-based criteria to certain of its executives and other key employees under its 2002 Stock Plan. These awards are scheduled to vest three years from the date of grant and expense is being recognized on a straight-line basis in proportion to the number of shares expected to vest. The number of shares that will ultimately vest will vary from 0% to 100% of the granted shares, depending upon the amount of cumulative recurring revenue (35% weight) and cumulative non-GAAP operating profit (65% weight) during the three-year period. On a quarterly basis, the Company assesses the number of shares that will ultimately vest and, if necessary, will record a cumulative adjustment to stock-based compensation expense recognized in the quarter the assessment changes.

The weighted average grant date fair value of RSUs was determined based on the closing market price of the Company’s common stock on the date of the award. The aggregate intrinsic value of RSUs outstanding at June 30, 2014 was $50.0 million based on the Company’s closing stock price of $32.57 per share on that date.