Stock-Based Compensation

Stock-based compensation expense, net of estimated forfeitures, was included in the following line items of the Company’s Consolidated Statements of Income as follows (in thousands):



	Fiscal Year Ended
	October 29, 2016		October 31, 2015		November 1, 2014
Cost of revenues	$	16,882	$	12,946	$	14,963
Research and development	29,298		18,714		18,635
Sales and marketing	53,357		38,340		31,650
General and administrative	31,469		18,528		19,666
Total stock-based compensation expense	$	131,006	$	88,528	$	84,914

The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):



	Fiscal Year Ended
	October 29, 2016		October 31, 2015		November 1, 2014
Stock options	$	5,612	$	3,675	$	4,581
RSUs, including restricted stock units with market conditions	105,657		67,735		62,906
Employee stock purchase plan (“ESPP”)	19,737		17,118		17,427
Total stock-based compensation expense	$	131,006	$	88,528	$	84,914

The following table presents the unrecognized compensation expense, net of estimated forfeitures, of the Company’s equity compensation plans as of October 29, 2016, which is expected to be recognized over the following weighted-average periods (in thousands, except for the weighted-average period):



	Unrecognized Compensation Expense		Weighted- Average Period (In years)
Stock options	$	1,364	0.89
RSUs, including restricted stock units with market conditions	$	143,209	2.06
ESPP	$	17,522	1.10

In accordance with the applicable accounting guidance for stock-based compensation, the compensation expense for stock-based awards is reduced by an estimate for forfeitures and is recognized over the requisite service period of the respective awards. To the extent that the actual forfeitures differ from the estimated forfeitures, the Company records the difference in the period that the awards vest. The Company estimates the forward-looking forfeiture rate, using the Company’s historical forfeiture rates, annually during the second fiscal quarter, and whenever events occur or facts and circumstances indicate that the current forfeiture rate estimate is significantly different from historical forfeitures. Changes in the estimated forfeiture rates and differences between the estimated forfeiture rates and actual forfeiture rates may result in significant increases or decreases in stock-based compensation expense from period to period.

Based on the results of the annual forfeiture rate analysis performed during the second fiscal quarter of 2016, there was no significant impact related to the change in the estimated forfeiture rates in fiscal year 2016. However, in the second fiscal quarter of 2015, the Company increased its expected forfeiture rate and recorded a cumulative reduction to stock-based compensation expense of $5.6 million in fiscal year 2015.

Stock Options

The fair value of each option granted during the respective period is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The dividend yield reflects the cash dividends paid by Brocade starting in the third quarter of fiscal year 2014. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. For stock options granted prior to November 1, 2015, the expected volatility is based on an equal weighted-average of implied volatilities from traded options of the Company’s common stock and historical volatility of the Company’s common stock. For stock options granted on or subsequent to November 1, 2015, the expected volatility is based on historical volatility of the Company’s common stock. The expected term is based on historical exercise behavior.



	Fiscal Year Ended
	October 29, 2016		October 31, 2015		November 1, 2014
Expected dividend yield	2.3	%	1.3	%	0.0% - 1.5%
Risk-free interest rate	0.0 - 1.3%		1.1 - 1.8%		0.7 - 2.3%
Expected volatility	32.1 - 39.0%		36.5	%	36.8 - 39.4%
Expected term (in years)	1.1 - 4.5		4.5		5.0

Compensation expense computed under the fair value method for stock options issued is being amortized under a graded vesting method over the options’ vesting period. A summary of stock option activity under the equity compensation plans for the fiscal years ended October 29, 2016, October 31, 2015, and November 1, 2014, is presented as follows:



	Shares (In thousands)		Weighted-Average Exercise Price		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (In thousands)
Outstanding as of October 26, 2013	12,561		$	6.19			2.37	$	24,784
Granted	1,770		$	9.03	$	3.16
Exercised	(6,971	)	$	5.93				$	24,240
Forfeited or expired	(1,161	)	$	8.93
Outstanding as of November 1, 2014	6,199		$	6.79			4.74	$	24,452
Granted	1,117		$	10.89	$	3.09
Exercised	(564	)	$	6.68				$	2,980
Forfeited or expired	(61	)	$	8.20
Outstanding as of October 31, 2015	6,691		$	7.47			4.37	$	20,252
Granted	1,395		$	9.30	$	0.88
Exercised	(371	)	$	6.05				$	1,258
Forfeited or expired	(47	)	$	8.88
Outstanding as of October 29, 2016	7,668		$	7.86			4.30	$	10,372
Vested and expected to vest as of October 29, 2016	7,486		$	7.82			4.26	$	10,353
Exercisable and vested as of October 29, 2016	5,377		$	7.25			3.62	$	9,643

Restricted Stock Units, Including Restricted Stock Units with Market Conditions

Prior to the initial declaration of a quarterly cash dividend on May 22, 2014, the fair value of time-based RSUs was measured based on the grant-date share price because Brocade did not historically pay cash dividends on its common stock. For awards granted on or subsequent to May 22, 2014, the fair value of time-based RSUs is measured based on the grant-date share price, less the present value of expected dividends during the vesting period, discounted at a risk-free interest rate. The fair value of MSUs is estimated using a lattice model that incorporates a Monte Carlo simulation. A summary of the changes in nonvested RSUs, including MSUs, under Brocade’s equity compensation plans during the fiscal years ended October 29, 2016, October 31, 2015, and November 1, 2014, respectively, is presented as follows:



	Shares (In thousands)		Weighted-Average Grant Date Fair Value
Nonvested as of October 26, 2013	22,761		$	3.85
Granted	11,582		$	9.69
Vested	(11,750	)	$	5.59
Forfeited	(3,594	)	$	6.01
Nonvested as of November 1, 2014	18,999		$	5.93
Granted	10,777		$	11.46
Vested	(8,317	)	$	7.81
Forfeited	(2,260	)	$	8.69
Nonvested as of October 31, 2015	19,199		$	9.82
Granted	19,143		$	7.92
Vested	(9,570	)	$	8.96
Forfeited	(3,755	)	$	9.84
Nonvested as of October 29, 2016	25,017		$	9.07
Vested and expected to vest as of October 29, 2016	21,093		$	9.10

A summary of the changes in nonvested MSUs included in the above summary of changes in nonvested RSUs under Brocade’s equity compensation plans during the fiscal year ended October 29, 2016, is presented as follows:



	Shares (In thousands)		Weighted-Average Grant Date Fair Value
Nonvested as of October 31, 2015	1,936		$	9.65
Granted	1,090		$	6.18
Vested	(560	)	$	8.93
Forfeited	(1,487	)	$	10.55
Nonvested as of October 29, 2016	979		$	8.94
Vested and expected to vest as of October 29, 2016	784		$	9.05

Typically, vesting of RSUs occurs over one to four years and is subject to the employee’s continuing service to Brocade.

The aggregate intrinsic value of nonvested RSUs at October 29, 2016, October 31, 2015, and November 1, 2014, was $217.4 million, $200.1 million, and $203.9 million, respectively.

Employee Stock Purchase Plan

Under the 2009 ESPP, eligible employees can participate and purchase shares semiannually at a discount of up to 15% of the lesser of the fair market value of the Company’s common stock on (i) the first trading day of the offering period, or (ii) the last day of each six-month purchase period. The 2009 ESPP permits eligible employees to purchase common stock through payroll deductions for up to 15% of qualified compensation. The Company accounts for the 2009 ESPP as a compensatory plan and compensation expense is being amortized under a graded vesting method over the 24-month offering period. In addition, the Company accounts for changes in percentage contribution elected by employees, as well as decreases in the Company’s common stock price on the last day of each six-month purchase period as compared to the common stock price on the first trading day of the offering period, by applying modification accounting which results in an increase in compensation expense during the period of modification.

The fair value of the option component of the 2009 ESPP shares was estimated using the Black-Scholes option pricing model and the weighted-average assumptions noted in the following table:



	Fiscal Year Ended
	October 29, 2016		October 31, 2015		November 1, 2014
Expected dividend yield	2.3	%	1.4	%	1.4	%
Risk-free interest rate	0.7	%	0.3	%	0.2	%
Expected volatility	35.7	%	27.3	%	30.1	%
Expected term (in years)	1.4		1.2		1.3