Stock-Based Compensation

Our stock-based compensation expense is associated with stock options, RSUs, PSUs and our ESPP.

Our consolidated statements of income include stock-based compensation expense, net of amounts capitalized as inventory, as follows:



	Year Ended
	January 25, 2015		January 26, 2014		January 27, 2013
	(In thousands)
Cost of revenue	$	12,022	$	10,688	$	10,490
Research and development	88,355		82,940		82,157
Sales, general and administrative	57,464		42,667		44,015
Total	$	157,841	$	136,295	$	136,662

Stock-based compensation capitalized in inventories resulted in a net charge of $0.1 million, $0.1 million and $0.4 million in cost of revenue during the fiscal years 2015, 2014 and 2013, respectively.

The following is a summary of equity awards granted under our equity incentive plans:



	Year Ended
	January 25,		January 26,		January 27,
	2015		2014		2013
	(In thousands, except per share data)
Stock Options
Awards granted	86		6,149		7,119
Estimated total grant-date fair value	$	345	$	21,310	$	38,326
Weighted average grant-date fair value (per share)	$	4.02	$	3.47	$	5.38

RSUs and PSUs
Awards granted	12,912		10,757		8,136
Estimated total grant-date fair value	$	228,223	$	144,798	$	112,795
Weighted average grant-date fair value (per share)	$	17.68	$	13.46	$	13.86

ESPP
Shares purchased	6,672		6,124		5,463
Weighted average price (per share)	$	10.99	$	10.79	$	10.83
Weighted average grant-date fair value (per share)	$	4.99	$	5.60	$	5.16

During fiscal year 2015, we shifted away from granting stock options and toward granting RSUs and PSUs to reflect changing market trends for equity incentives at our peer companies. The number of PSUs that will ultimately vest is contingent on the Company’s level of achievement versus the corporate financial performance target established by our Compensation Committee in the beginning of each fiscal year. The number of shares of our stock to be received at vesting typically ranges from 0% to 200% of the target amount.

Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest for fiscal years 2015, 2014 and 2013 was $36.6 million, $29.7 million and $27.1 million, respectively.



	January 25,		January 26,
	2015		2014
	(In thousands)
Aggregated unearned stock-based compensation expense	$	291,416	$	256,500

Estimated weighted average amortization period	(In years)
Stock Options	1.8		2.5
RSUs and PSUs	2.8		2.7
ESPP	0.5		0.6

Valuation Assumptions

We use the closing trading price of our common stock on the date of grant, minus a dividend yield discount, as the fair value of awards of RSUs and PSUs. Compensation expense for RSUs is recognized using a straight-line attribution method over the requisite employee service period, while compensation expense for PSUs is recognized using an accelerated amortization model.

We estimate the fair value of employee stock options on the date of grant using a binomial model and recognize the expense using a straight-line attribution method over the requisite employee service period.

We estimate the fair value of shares to be issued under our ESPP using the Black-Scholes model at the commencement of an offering period in March and September of each year. Stock-based compensation for our ESPP is expensed using an accelerated amortization model.

The fair value of stock options granted under our stock option plans and shares issued under our ESPP have been estimated with the following assumptions:



	Year Ended
	January 25, 2015	January 26, 2014	January 27, 2013
	(Using a binomial model)
Stock Options
Weighted average expected life (in years)	2.5-3.2	2.4-3.5	3.1-4.9
Risk-free interest rate	2.5%-2.8%	1.8%-3.0%	1.5%-2.3%
Volatility	31%	28%-37%	39%-49%
Dividend yield	1.8%-1.9%	1.9%-2.4%	2.4%



	Year Ended
	January 25, 2015	January 26, 2014	January 27, 2013
	(Using the Black-Scholes model)
ESPP
Weighted average expected life (in years)	0.5-2.0	0.5-2.0	0.5-2.0
Risk-free interest rate	0.1%-0.5%	0.1%-0.4%	0.1%-0.3%
Volatility	23%-31%	32%-37%	44%-47%
Dividend yield	1.7%-1.9%	2.0%-2.4%	—

The expected life of employee stock options is a derived output of our valuation model and is impacted by the underlying assumptions of our company. For ESPP shares, the expected term represents the average term from the first day of the offering period to the purchase date.

The risk-free interest rate assumption used to value stock options and ESPP is based upon observed interest rates on Treasury bills appropriate for the expected term of the award.

Our expected stock price volatility assumption for stock options and ESPP is estimated using implied volatility.

For awards granted on or subsequent to November 8, 2012, we use a dividend yield at grant date, based on the per share dividends declared during the most recent quarter. Our RSU and PSU awards are not eligible for cash dividends prior to vesting; therefore, the fair value of RSUs and PSUs is discounted by the dividend yield.

Additionally, for employee stock options and RSU and PSU awards, we estimate forfeitures annually and revise the estimates of forfeiture in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

Equity Incentive Program

We grant stock options, RSUs, PSUs, and stock purchase rights under the following equity incentive plans.

Amended and Restated 2007 Equity Incentive Plan

In 2007, our shareholders approved the NVIDIA Corporation 2007 Equity Incentive Plan, or the 2007 Plan. The 2007 Plan was amended and restated in 2012, 2013 and 2014, or the Restated 2007 Plan.

The Restated 2007 Plan authorizes the issuance of incentive stock options, non-statutory stock options, restricted stock, restricted stock unit, stock appreciation rights, performance stock awards, performance cash awards, and other stock-based awards to employees, directors and consultants. Only our employees may receive incentive stock options. With the 2014 amendment and restatement of the 2007 Plan, which increased the number of shares of common stock authorized for issuance under the 2007 Plan by 10,000,000 shares, up to 187,767,766 shares of our common stock may be issued pursuant to stock awards granted under the Restated 2007 Plan. Currently, we grant stock options, RSUs and PSUs under the Restated 2007 Plan, under which, as of January 25, 2015, there were 24,501,781 shares available for future issuance.

Stock options granted to employees, subject to certain exceptions, vest over a four year period, subject to continued service, with 25% vesting on the anniversary of the hire date in the case of new hires or the anniversary of the date of grant in the case of grants to existing employees and 6.25% vesting at the end of each quarterly period thereafter. Options granted under the 2007 Plan generally expire ten years from the date of grant.

Subject to certain exceptions, RSUs granted to employees vest over a four year period, subject to continued service, with 25% vesting on a pre-determined date that is close to the anniversary of the date of grant and 12.5% vesting semi-annually thereafter until fully vested.

PSUs granted to employees vest on a similar schedule, although the number of shares subject to PSUs that are eligible to vest is generally determined by the Compensation Committee based on achievement of pre-determined criteria.

Unless terminated sooner, the Restated 2007 Plan is scheduled to terminate on March 21, 2022. Our Board may suspend or terminate the Restated 2007 Plan at any time. No awards may be granted under the Restated 2007 Plan while the Restated 2007 Plan is suspended or after it is terminated. The Board may also amend the Restated 2007 Plan at any time. However, if legal, regulatory or listing requirements require shareholder approval, the amendment will not go into effect until the shareholders have approved the amendment.

PortalPlayer, Inc. 1999 Stock Option Plan

We assumed options issued under the PortalPlayer, Inc. 1999 Stock Option Plan, or the 1999 Plan, when we completed our acquisition of PortalPlayer on January 5, 2007. As of January 25, 2015, there were no outstanding options to purchase NVIDIA common stock under the 1999 Plan and we do not intend to grant future stock awards under the 1999 Plan as the plan expired on July 28, 2014.

1998 and 2012 Employee Stock Purchase Plans

In February 1998, our Board approved the 1998 Employee Stock Purchase Plan, or the 1998 Plan. At the Annual Meeting of Shareholders held on May 17, 2012, our shareholders approved the 2012 Employee Stock Purchase Plan, or the 2012 Plan, as the successor to the 1998 Plan. At the Annual Meeting of Shareholders held on May 23, 2014, our shareholders approved an amendment and restatement of the 2012 Plan, or the Restated 2012 Plan.

Prior to the effective date of the 2012 Plan, we had authorized a total of 78,000,000 shares for issuance under the 1998 Plan, 54,567,667 shares of which had been issued, 15,000,000 shares of which were reserved for issuance pursuant to outstanding purchase rights and 8,432,333 shares of which were available for future issuance. Upon its approval by our shareholders in 2012, the maximum aggregate number of shares that could be issued under the 2012 Plan would not exceed 55,432,333 shares.

Effective upon the August 31, 2012 purchase date pursuant to the 1998 Plan, of the 15,000,000 shares which had been reserved for issuance pursuant to outstanding purchase rights, 2,687,698 shares were issued pursuant to outstanding purchase rights, 183,000 shares were available but reserved for future issuance, and the remaining 12,129,302 shares were moved into the share reserve of the 2012 Plan. Effective upon the final February 28, 2013 purchase date pursuant to the 1998 Plan, 8,819 shares were issued pursuant to outstanding purchase rights, and the remaining 174,181 shares were moved into the share reserve of the 2012 Plan. With the 2014 amendment and restatement of the 2012 Plan, which increased the share reserve of the Restated 2012 Plan by 12,500,000 shares, up to 65,235,816 shares of our common stock may be issued pursuant to purchases under the Restated 2012 Plan. At January 25, 2015, we had issued 12,787,748 shares and reserved 52,448,068 shares for future issuance under the Restated 2012 Plan.

The Restated 2012 Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Under the current offerings adopted pursuant to the Restated 2012 Plan, each offering period is 24 months, which is divided into four purchase periods of six months.

Employees are eligible to participate if they are employed by us or an affiliate of us as designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld up to certain limitations and applied on specified dates determined by the Board to the purchase of shares of common stock. The Board may increase this percentage at its discretion, up to 15%. The price of common stock purchased under our ESPP will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering period and the purchase date of each offering period. Employees may end their participation in the ESPP at any time during the offering period, and participation ends automatically on termination of employment with us. In each case, the employee’s contributions are refunded.

The following is a summary of our equity award transactions under our equity incentive plans:



	Options Outstanding							RSUs and PSUs Outstanding
	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (1)		Number of Shares		Weighted Average Grant-Date Fair Value
	(In thousands, except years and per share data)
Balances, January 26, 2014	32,504		$	14.22				18,852		$	13.82
Granted (2)	86		$	18.75				12,912		$	17.68
Exercised	(9,795	)	$	12.64				—		—
Vested restricted stock	—		—					(7,163	)	$	13.78
Canceled and forfeited	(1,450	)	$	19.27				(1,326	)	$	14.44
Balances, January 25, 2015	21,345		$	14.61	5.9	$	130,923	23,275		$	15.94
Exercisable at January 25, 2015	15,120		$	14.70	5.1	$	91,434
Vested and expected to vest after January 25, 2015	20,356		$	14.62	5.8	$	124,575	18,988		$	15.96

(1)

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at January 25, 2015, based on the $20.71 closing stock price of our common stock on the NASDAQ Global Select Market on January 23, 2015, the last trading day of fiscal year 2015, which would have been received by the option holders had all in-the-money option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of January 25, 2015 was 21.1 million shares and 14.9 million shares, respectively.

(2)

Includes the total number of PSUs issuable if the maximum corporate financial performance target level for fiscal year 2015 is achieved. Depending on the actual level of achievement of the corporate performance target at the end of fiscal year 2015, the range of PSUs issued could be from 1.3 million to 2.5 million shares. The PSUs were granted during the first quarter of fiscal year 2015 to our CEO and senior management as approved by our Compensation Committee.

As of January 25, 2015 and January 26, 2014, there were 24.5 million and 24.7 million shares of common stock reserved for future issuance under our equity incentive plans.

The total intrinsic value of options exercised was $61.9 million, $14.4 million and $21.1 million for fiscal years 2015, 2014 and 2013, respectively. Upon exercise of an option, we issue new shares of stock. The total fair value of options vested was $32.6 million, $34.6 million and $40.3 million for fiscal years 2015, 2014 and 2013, respectively.