9. Stockholder’s Equity and Stock Based Compensation

Common Stock Authorized and Outstanding

As of March 31, 2015, the Company was authorized to issue 1,000,000,000 common shares with a par value of $0.0001 per share and 20,000,000 convertible preferred shares with a par value of $0.0001 per share. As of March 31, 2015, the Company had approximately 42.1 million shares of common stock issued and outstanding.

Summary of Stock Option Activity

A summary of the Company’s stock option activity under all stock option plans and related information for three months ended March 31, 2015 is as follows:

	Number of Stock Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
	(in thousands)				(Years)	(in thousands)

Balance as of December 31, 2014	5,404		$	11.55	7.56	$	120,595
Granted	—		—
Exercised	(278	)	3.47
Repurchased	—		—
Cancelled/forfeited	(157	)	12.79
Balance as of March 31, 2015	4,969		11.96		7.18	80,350

Exercisable as of March 31, 2015	4,163		7.27		7.01	79,948
Vested and expected to vest as of March 31, 2015	4,682		$	11.50	7.13	$	77,198

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing price of $25.62 as of March 31, 2015 for options that were in-the-money as of that date.

Option awards generally vest over a four year period, with 25% vesting after one year from date of grant and monthly thereafter. Stock options granted under the Company’s 2006 Plan provided option holders with an early exercise provision, where in the event of termination any unvested shares purchased are subject to repurchase by the Company at the original purchase price. This right of repurchase lapses as the option vests. Options exercisable as of March 31, 2015 include options that are exercisable prior to vesting.

The weighted average grant date fair value of options granted and the total intrinsic value of options exercised were as follows (in thousands, except weighted average grant date fair value):

	Three Months Ended March 31,
	2015		2014
Weighted average grant date fair value of options granted	N/A		$	21.78
Total intrinsic value of options exercised	$	7,583	$	28,623

The total estimated grant date fair value of options vested during the three months ended March 31, 2015 was approximately $5.7 million.

Determining Fair Value of Stock Options

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model. The following assumptions were used to estimate the fair value of options granted to employees:

	Three Months Ended March 31,
	2015	2014
Expected term (in years)	N/A	6
Risk-free interest rate	N/A	1.84%
Expected volatility	N/A	56%
Expected dividend rate	N/A	0%

Restricted Stock Units

A summary of the Company’s Restricted Stock Units (RSUs) activity and related information for the three months ended March 31, 2015 are as follows:

	Number of RSUs		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
	(in thousands)				(in thousands)

Balance as of December 31, 2014	2,360		$	33.30	$	77,207
RSUs Granted	1,082		34.50
RSUs Vested	(215	)	41.36
RSUs Cancelled/Forfeited	(108	)	32.70
Balance as of March 31, 2015	3,119		$	33.18	$	79,922

RSUs granted during the three months ended March 31, 2015 are subject to a time-based vesting condition that ranges from 3 to 4 years.

The aggregate intrinsic value of RSUs outstanding at March 31, 2015 was determined using the Company’s closing stock price of $25.62 per share as of March 31, 2015.

The weighted average grant date fair value of RSUs granted and the total intrinsic value of RSUs that vested during the periods presented were as follows (in thousands, except weighted average grant date fair value):

	Three Months Ended March 31,
	2015		2014
Weighted average grant date fair value of RSUs granted	$	34.50	$	41.57
Total intrinsic value of vested RSUs	$	6,029	$	195

Market Stock Units

In February 2015, the Compensation Committee of the Company’s Board of Directors granted market-performance based restricted stock units (MSUs) to its executive officers. MSU awards are granted under the Company’s 2013 Equity Incentive Plan.

Each MSU award granted in the first quarter of fiscal 2015 contains three separate tranches. The actual number of MSUs which will be eligible to vest in each tranche will be based on the performance of the Company’s stock price relative to the performance of the NASDAQ Composite Index over the vesting period of each tranche, which ranges from one to three years. MSU participants have the ability to receive up to 100% of the target number of shares in tranche 1 and 2 and up to 150% of the target number of shares in tranche 3.

The following table summarizes the MSU activity as of March 31, 2015:

	Number of Shares Underlying MSUs	Weighted Average Grant Date Fair Value		Weighted Average Remaining Vesting Period	Aggregate Intrinsic Value
	(in thousands)			(in years)	(in thousands)

Balance as of December 31, 2014	—	$	—	—	$	—
MSUs Granted	240	37.53
MSUs Vested	—	—
MSUs Cancelled/Forfeited	—	—
Balance as of March 31, 2015	240	$	37.53	1.88	$	6,144

The aggregate intrinsic value of MSUs outstanding was determined using the Company’s closing stock price of $25.62 as of March 31, 2015.

The fair value of each MSU award is determined by multiplying the fair value per share by the underlying number of shares. The fair value per share was determined on the grant date using the Monte Carlo valuation methodology and the assumptions described in the table below. The fair value per share for Tranche 1, Tranche 2, and Tranche 3 is $9.10, $8.68 and $19.75, respectively. The Company amortizes the fair value of each MSU award using the graded-vesting method, adjusted for estimated forfeitures. Stock-based compensation expense associated with participants who fulfill their requisite service period is not reversed even if the performance conditions are not met. However, stock-based compensation expense is reversed for participants who forfeit their MSU awards prior to fulfilling their requisite service period.

The fair value of the MSUs granted during the first quarter of fiscal 2015 was estimated using the following weighted-average assumptions:

		Three Months
		Ended March 31, 2015

Expected term (in years)		3
Risk-free interest rate		0.99%
Expected volatility		39%
Expected dividend rate		0%

Employee Stock Purchase Plan

The assumptions used to value employee stock purchase rights under the Black-Scholes model during the three months ended March 31, 2015 and 2014 were as follows:

	Three Months Ended March 31,
	2015	2014
Expected term (in months)	6	6 - 9
Risk-free interest rate	0.05 - 0.07%	0.08% - 0.11%
Expected volatility	39% - 43%	41% - 42%
Expected dividend rate	0%	0%

During the first three months of fiscal 2015, the Company issued approximately 0.1 million shares of common stock under the ESPP with an average purchase price of $23.87 per share.

Stock Compensation Expense

The stock-based compensation expense included in operating results was allocated as follows (in thousands):

	Three Months Ended March 31,
	2015		2014

Cost of subscription and support revenue	$	619	$	384
Cost of professional services and other revenue	937		447
Research and development	2,316		1,079
Sales and marketing	2,802		1,779
General and administrative	2,607		1,318
Total stock-based compensation expense	$	9,281	$	5,007

For the quarter ended March 31, 2015, the Company incurred expenses of $2.3 million for options, $6.5 million for RSUs, $0.6 million for MSUs and $0.4 million for ESPP. Additionally, the Company capitalized stock-based compensation expense of $0.5 million associated with the Company’s internal-use software projects. Amounts for the first quarter of 2015 include stock compensation expense of $0.7 million related to performance-based RSUs that are tied to product milestones issued in connection with an acquisition that occurred in December 2014.

As of March 31, 2015, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimate forfeitures, was as follows:

	March 31, 2015
	Unrecognized Expense		Average Expected Recognition Period
	(in thousands)		(in years)
Stock options	$	16,493	1.94
Restricted stock units and market stock units	79,485		3.12
Employee stock purchase plan	585		0.38
Total unrecognized stock-based compensation expense	$	96,563	2.90