STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2021

Share-based Payment Arrangement [Abstract]

STOCK-BASED COMPENSATION

15. STOCK-BASED COMPENSATION

(in thousands)	2021		2020		2019
Cost of revenue	$	21,822	$	20,796	$	18,822
Selling and marketing	54,182		46,283		32,665
Research and development	25,413		22,885		18,938
General and administrative	14,530		13,104		10,484
	$	115,947	$	103,068	$	80,909
Income tax benefit	$	(23,410)	$	(20,464)	$	(16,392)

The Company periodically grants employees stock options and restricted stock units (“RSUs”) and non-employee Directors common stock and stock options.

Most of the Company’s stock-based compensation arrangements vest over five years, with 20% vesting after one year and the remaining 80% vesting in equal quarterly installments over the remaining four years. The Company’s stock options have a term of ten years. The Company recognizes stock-based compensation using the accelerated attribution method, treating each vesting tranche as if it were an individual grant. The stock-based compensation expense recognized during a period is based on the value of the awards that are expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the Company recognizes the actual expense over the vesting period only for the shares that vest.

Employees may elect to receive 50% of the employee’s target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. If elected by an employee, the equity amount is equal in value on the date of grant to 50% of the employee’s target incentive opportunity, based on the employee’s base salary. The number of RSUs granted is determined by dividing 50% of the employee’s target incentive opportunity by 85% of the closing price of the Company’s common stock on the grant date, less the present value of expected dividends during the vesting period. If elected, the award vests 100% on the following year’s CICP payout date. Vesting is conditioned upon the performance conditions of the CICP and on continued employment; if threshold funding does not occur, the RSUs will not vest. The Company considers vesting to be probable on the grant date and recognizes the associated stock-based compensation expense over the requisite service period beginning on the grant date and ending on the vesting date.

The Company grants awards that allow for the settlement of vested stock options and RSUs on a net share basis (“net settled awards”). With net settled awards, the employee does not surrender any cash or shares upon exercise. Instead, the Company withholds the number of shares to cover the exercise price (in the case of stock options) and the minimum statutory tax withholding obligations (in the case of stock options and RSUs) from the shares that would otherwise be issued upon exercise or settlement. The exercise of stock options and settlement of RSUs on a net share basis results in fewer shares being issued by the Company.

Stock-based compensation plans

2004 Long-Term Incentive Plan (as amended and restated)

In 2004, the Company adopted the 2004 Long-Term Incentive Plan (as amended and restated, the “2004 Plan”) to provide employees, non-employee Directors, and consultants with opportunities to purchase stock through incentive stock options and non-qualified stock options. Subsequent amendments to the plan increased the number of shares authorized for issuance under the plan to 36 million, extended the term of the plan to 2030, and limited annual compensation to any non-employee Director to $0.5 million.

As of December 31, 2021, 9.2 million shares were subject to outstanding options and stock-based awards under the 2004 Plan.

2006 Employee Stock Purchase Plan

In 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the “2006 ESPP”) under which employees may purchase up to an aggregate of one million shares of common stock, at a price equal to at least 85% of the fair market value of the Company’s common stock on the lesser of the commencement date or completion date for offerings under the plan, or such higher price as the Company’s Board of Directors may establish from time to time. In October 2012, the Company’s Board of Directors amended the 2006 ESPP to continue until no shares remain. Before January 1, 2021, the 2006 ESPP was non-compensatory as the Company’s Board of Directors set the purchase price at 95% of the fair market value on the completion date of the offering period. Commencing on January 1, 2021, the Company’s Board of Directors set the purchase price at 85% of the fair market value on the completion date of the offering period.

(in thousands)	2021
Compensation expense from 2006 ESPP	$	1,860

As of December 31, 2021, 0.6 million shares had been issued under the plan.

Shares issued and available for issuance

During 2021, the Company issued 1.3 million shares to its employees and directors under the Company’s stock-based compensation plans.

As of December 31, 2021, there were 10.4 million shares available for issuance for future equity grants under the Company’s stock plans, consisting of 10.0 million shares under the 2004 Plan and 0.4 million shares under the 2006 ESPP.

Grant activity

Stock options

The Company estimates the fair value of stock options using a Black-Scholes option-pricing model. Key inputs used to estimate the fair value of stock options include the exercise price of the award, expected term of the option, expected volatility of the Company’s common stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The exercise price for stock options is greater than or equal to the shares’ fair market value at the grant date.

The following table summarizes the Company’s fair value assumptions for stock options:

	2021			2020			2019
Weighted-average grant-date fair value	$	37.74		$	24.16		$	19.10
Assumptions used in the Black-Scholes option-pricing model:
Expected annual volatility (1)	35		%	31 %			32		%
Expected term in years (2)	4.4			4.5			4.5
Risk-free interest rate (3)	0.6		%	0.7		%	2.4		%
Expected annual dividend yield (4)	0.2		%	0.2		%	0.3		%

(1) The expected annual volatility for each grant is determined based on the average of historic daily price changes of the Company’s common stock over a period, which approximates the expected option term.

(2) The expected option term for each grant is determined based on the historical exercise behavior of employees and post-vesting employment termination behavior.

(3) The risk-free interest rate is based on the yield of U.S. Treasury securities with a commensurate maturity with the expected option term at the time of grant.

(4) The expected annual dividend yield is based on the weighted-average dividend yield assumptions used for options granted during the applicable period.

The following table summarizes the combined stock option activity under the Company’s stock option plans for 2021:

	Shares (in thousands)	Weighted-average Exercise Price		Weighted-average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Options outstanding as of January 1, 2021	7,391	$	59.88
Granted	1,574	129.71
Exercised	(1,170)	47.93
Forfeited	(606)	85.69
Options outstanding as of December 31, 2021	7,189	$	74.94
Vested and expected to vest as of December 31, 2021	6,176	$	71.97	6.7	$	267,722
Exercisable as of December 31, 2021	3,398	$	50.06	5.4	$	210,796

The aggregate intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee at exercise) in 2021, 2020, and 2019 was $94.3 million, $126.8 million, and $63.3 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable as of December 31, 2021 is based on the difference between the closing price of the Company’s stock of $111.82 and the exercise price of the applicable stock options.

As of December 31, 2021, the Company had unrecognized stock-based compensation expense related to the unvested portion of stock options of $39.8 million that is expected to be recognized as expense over a weighted-average period of 2.2 years.

RSUs

RSUs deliver to the recipient a right to receive a specified number of shares of the Company’s common stock upon vesting. The Company values its RSUs at the fair value of its common stock on the grant date, which is the closing price of its common stock on the grant date less the present value of expected dividends during the vesting period, as the recipient is not entitled to dividends during the requisite service period.

The weighted-average grant-date fair value for RSUs granted in 2021, 2020, and 2019 was $129.03, $93.68, and $66.21, respectively.

The following table summarizes the combined RSU activity for all grants, including the CICP, under the 2004 Plan for 2021:

	Shares (in thousands)	Weighted- Average Grant-Date Fair Value		Aggregate Intrinsic Value (in thousands)
Nonvested as of January 1, 2021	2,462	$	74.78
Granted	945	129.03
Vested	(972)	70.19
Forfeited	(381)	88.01
Nonvested as of December 31, 2021	2,054	$	99.36	$	229,643
Expected to vest as of December 31, 2021	1,523	$	101.32	$	170,357

The fair value of RSUs vested in 2021, 2020, and 2019 was $122.5 million, $108.4 million, and $77.0 million, respectively. The aggregate intrinsic value of RSUs outstanding and expected to vest as of December 31, 2021 is based on the closing price of the Company’s stock of $111.82 as of December 31, 2021.

As of December 31, 2021, the Company had $73.1 million of unrecognized stock-based compensation expense related to all unvested RSUs that is expected to be recognized as expense over a weighted-average period of 2.1 years.

Common stock

In 2021, the Company granted 0.01 million shares of common stock to Directors with a weighted-average grant-date fair value of $127.50 per share.