Stock Based Compensation

9 Months Ended

Oct. 25, 2015

Employee Service Share-based Compensation, Aggregate Disclosures [Abstract]

Our stock-based compensation expense is associated with stock options, restricted stock units, or RSUs, performance stock units that are based on our corporate financial performance targets, or PSUs, performance stock units that are based on market conditions, or market-based PSUs, and our employee stock purchase plan, or ESPP.

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 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, and we use a Monte Carlo simulation on the date of grant to estimate the fair value of market-based PSUs. We use a Black-Scholes valuation at the commencement of an offering period in March and September of each year to estimate the fair value of the shares to be issued under our ESPP.

Stock-based compensation expense for stock options, RSUs and market-based PSUs is recognized using a straight-line attribution method over the requisite employee service period, while compensation expense for PSUs and ESPP is recognized using an accelerated amortization model.

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



	Three Months Ended				Nine Months Ended
	October 25, 2015		October 26, 2014		October 25, 2015		October 26, 2014
	(In millions)
Cost of revenue	$	4	$	4	$	10	$	8
Research and development	28		22		82		65
Sales, general and administrative	19		16		53		42
Total	$	51	$	42	$	145	$	115

Equity Award Activity

The following summarizes the stock option, RSU, PSU and market-based PSU activity under our equity incentive plans:



	Awards Outstanding		Weighted Average Exercise Price
Stock Options	(In millions)		(Per share)
Balances, January 25, 2015	21		$14.61
Granted	—		—
Exercised	(6	)	$14.48
Cancelled	—		—
Balances, October 25, 2015	15		$14.55



	Awards Outstanding		Weighted Average Grant-Date Fair Value
RSUs, PSUs and Market-based PSUs	(In millions)		(Per share)
Balances, January 25, 2015	23		$15.94
Granted (1) (2)	13		$21.61
Vested	(8	)	$15.53
Cancelled	(2	)	$16.40
Balances, October 25, 2015	26		$18.84

(1)

Includes the total PSUs that become eligible to vest if the corporate financial performance maximum target level for fiscal year 2016 is achieved. Using an estimate for the level of achievement of the corporate performance target at the end of fiscal year 2016, we are estimating PSUs that become eligible to vest for fiscal year 2016 performance to be in the range of 0 to 2 million shares. We granted PSUs during the first quarter of fiscal year 2016 to our CEO and senior management as approved by our Compensation Committee.

(2)

Includes the market-based PSUs that become eligible to vest if the maximum target for total shareholder return, or TSR, over the 3-year measurement period is achieved. Depending on the ranking of our TSR compared to the respective TSRs of the companies comprising the Standard & Poor’s 500 Index during a 3-year measurement period, the market-based PSUs that become eligible to vest could range from 0 to 0.4 million shares. We granted market-based PSUs during the first quarter of fiscal year 2016 to our CEO and senior management as approved by our Compensation Committee.

Of the total fair value of equity awards granted during the three and nine months ended October 25, 2015, the stock-based compensation expense related to equity awards that are not expected to vest was $34 million and $43 million, respectively. Of the total fair value of equity awards granted during the three and nine months ended October 26, 2014, the stock-based compensation expense related to equity awards that are not expected to vest was $28 million and $35 million, respectively.

The following summarizes the aggregate unearned stock-based compensation expense and estimated weighted average amortization period as of October 25, 2015 and January 25, 2015:



	October 25,	January 25,
	2015	2015
	(In millions)
Aggregate unearned stock-based compensation expense	$420	$291

Estimated weighted average amortization period	(In years)
Stock options	1.3	1.8
RSUs, PSUs and market-based PSUs	3.0	2.8
ESPP	0.8	0.5