Note 9—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 March 31
	2015			2014
Statement of operations classification
Cost of recurring revenues	$	753		$	842
Cost of non-recurring revenues	311			375
Total cost of revenues	1,064			1,217

Sales and marketing	2,380			2,635
Product development	1,502			1,925
General and administrative	1,659			1,851
Total operating expenses	5,541			6,411

Total stock-based employee compensation expense	6,605			7,628

Tax effect on stock-based employee compensation expense	(2,694		)	(2,927		)

Effect on net income from continuing operations, net of tax	$	3,911		$	4,701

As of March 31, 2015, total compensation cost related to unvested awards not yet recognized under all equity compensation plans was $38.2 million and is expected to be recognized over the remaining vesting period of each grant, with a weighted average remaining period of 2.1 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 March 31
Stock Options & SARs	2015	2014
Risk-free interest rate	1.3% - 1.6%	1.5% - 1.6%
Volatility	22.7% - 33.1%	34.4% - 35.1%
Expected life (in years)	4.73 - 4.89	4.77
Expected dividend yield	0% - 1.5%	None

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 grants in January 2015 was determined by annualizing the most recent dividend declared and dividing the result by the Company’s closing stock price on the date of grant. On February 2, 2015 the Company entered into a Merger Agreement with SS&C and is prohibited from paying dividends during the pendency of the agreement. Therefore, the expected dividend yield for grants in February and March 2015 was zero. The dividend yield assumption for grants prior to April 28, 2014 was zero 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 three months ended March 31, 2015 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, 2014	5,076		$	17.38
Options & SARs granted	28		$	43.66
Options & SARs exercised	(946	)	$	13.39
Options & SARs canceled	(50	)	$	24.68
Outstanding at March 31, 2015	4,108		$	18.38	6.63	$	105,694
Exercisable at March 31, 2015	2,187		$	14.11	5.19	$	65,606

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 $44.11 on March 31, 2015 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):

	Three Months Ended March 31
	2015		2014
Options and SARs
Weighted average grant date fair value	$	12.17	$	10.34
Total intrinsic value of awards exercised	$	24,748	$	5,955

Options
Cash received from exercises	$	5,000	$	1,246

The Company’s RSU activity for the three months ended March 31, 2015 was as follows:

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

Outstanding and unvested at December 31, 2014	1,481		$	22.71
RSUs granted	10		$	42.20
RSUs vested	(6	)	$	27.81
RSUs canceled	(47	)	$	28.87
Outstanding and unvested at March 31, 2015	1,438		$	22.62

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 March 31, 2015 was $63.4 million based on the Company’s closing stock price of $44.11 per share on that date.