Stock-Based Compensation

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.

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



	Year Ended
	January 31, 2016		January 25, 2015		January 26, 2014
	(In millions)
Cost of revenue	$	15	$	12	$	11
Research and development	115		88		83
Sales, general and administrative	74		58		42
Total	$	204	$	158	$	136

Stock-based compensation capitalized in inventories was not significant during fiscal years 2016, 2015 and 2014.

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



	Year Ended
	January 31,		January 25,		January 26,
	2016		2015		2014
	(In millions, except per share data)
Stock Options
Awards granted	—		—		6
Estimated total grant-date fair value	$	—	$	—	$	21
Weighted average grant-date fair value (per share)	$	—	$	—	$	3.47

RSUs, PSUs and Market-based PSUs
Awards granted	13		13		11
Estimated total grant-date fair value	$	296	$	228	$	145
Weighted average grant-date fair value (per share)	$	22.01	$	17.68	$	13.46

ESPP
Shares purchased	6		7		6
Weighted average price (per share)	$	13.67	$	10.99	$	10.79
Weighted average grant-date fair value (per share)	$	4.53	$	4.99	$	5.60

Beginning fiscal year 2015, we shifted away from granting stock options and toward granting RSUs, PSUs and market-based 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.

Of the total fair value of equity awards, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest for fiscal years 2016, 2015 and 2014 was $46 million, $37 million and $30 million, respectively.



	January 31,		January 25,
	2016		2015
	(In millions)
Unearned stock-based compensation expense	$	381	$	291

Estimated weighted average remaining amortization period	(In years)
Stock Options	1.1		1.8
RSUs, PSUs and Market-based PSUs	2.7		2.8
ESPP	0.7		0.5

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 31, 2016	January 25, 2015	January 26, 2014
	(Using a binomial model)
Stock Options
Weighted average expected life (in years)	—	—	2.4-3.5
Risk-free interest rate	—	—	1.8%-3.0%
Volatility	—	—	28%-37%
Dividend yield	—	—	1.9%-2.4%



	Year Ended
	January 31, 2016	January 25, 2015	January 26, 2014
	(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%-0.7%	0.1%-0.5%	0.1%-0.4%
Volatility	24%-34%	23%-31%	32%-37%
Dividend yield	1.5%-1.8%	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 ESPP is estimated using historical volatility. For awards granted subsequent to November 7, 2012, we use the dividend yield at grant date. Our RSU, PSU and market-based PSU awards are not eligible for cash dividends prior to vesting; therefore, the fair values of RSUs, PSUs and market-based PSUs are discounted for the dividend yield.

Additionally, for employee stock option, RSU, PSU and market-based 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, market-based 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, which was subsequently amended and restated in 2012, 2013 and 2014, or the 2007 Plan.

The 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. Up to 187,767,766 shares of our common stock may be issued pursuant to stock awards granted under the 2007 Plan. Currently, we grant RSUs, PSUs and market-based PSUs under the 2007 Plan, under which, as of January 31, 2016, there were 13,538,400 shares available for future issuance.

Stock options previously 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. Stock options previously 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 vest on a similar schedule as our RSUs. Market-based PSUs vest 100% on approximately the three-year anniversary of the date of grant. However, the number of shares subject to both PSUs and market-based PSUs that are eligible to vest is generally determined by the Compensation Committee based on achievement of pre-determined criteria.

Unless terminated sooner, the 2007 Plan is scheduled to terminate on March 21, 2022. Our Board may suspend or terminate the 2007 Plan at any time. No awards may be granted under the 2007 Plan while the 2007 Plan is suspended or after it is terminated. The Board may also amend the 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.

2012 Employee Stock Purchase Plan

In 2012, our shareholders approved the 2012 Employee Stock Purchase Plan, which was subsequently amended and restated in 2014, or the 2012 Plan, as the successor to the 1998 Employee Stock Purchase Plan.

Up to 65,235,816 shares of our common stock may be issued pursuant to purchases under the 2012 Plan. As of January 31, 2016, we had issued 18,459,901 shares and reserved 46,775,915 shares for future issuance under the 2012 Plan.

The 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 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:



	RSUs, PSUs and Market-based PSUs Outstanding				Options Outstanding
	Number of Shares		Weighted Average Grant-Date Fair Value		Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (3)
	(In millions, except years and per share data)
Balances, January 25, 2015	23		$	15.94	21		$	14.61
Granted (1)(2)	13		$	22.01	—		$	—
Exercised	—		—		(7	)	$	14.60
Vested restricted stock	(8	)	$	15.56	—		—
Canceled and forfeited	(2	)	$	16.63	(1	)	$	17.28
Balances, January 31, 2016	26		$	19.12	13		$	14.49	5.9	$	197
Exercisable as of January 31, 2016					11		$	14.51	5.6	$	159
Vested and expected to vest after January 31, 2016	22		$	19.14	13		$	14.50	5.8	$	191


(1)	Includes the total number of PSUs that became eligible to vest based on the corporate financial performance level achieved for fiscal year 2016.

(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.


(3)	The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at January 31, 2016, based on the $29.29 closing price of our common stock on January 29, 2016.

As of January 31, 2016 and January 25, 2015, there were 14 million and 25 million shares, respectively, of common stock reserved for future issuance under our equity incentive plans.

The total intrinsic value of options exercised was $75 million, $62 million and $14 million for fiscal years 2016, 2015 and 2014, respectively. Upon exercise of an option, we issue new shares of stock. The total fair value of options vested was $17 million, $33 million and $35 million for fiscal years 2016, 2015 and 2014, respectively.