NOTE 13—Share-based Awards
Overview
The Company’s 2004 Long-Term Incentive Plan, as amended and restated (the “2004 Plan”), provides for the granting of stock options, service-based share awards and performance-based share awards, among other awards. As of February 28, 2013, there were 23.6 million shares of common stock reserved for issuance under future share-based awards to be granted to any employee, officer or director or consultant of the Company at terms and prices to be determined by the Board of Directors.
The following table summarizes share-based awards, by type, granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011:
| Awards
Granted Year Ended February 28, 2013 |
Awards
Granted Year Ended February 29, 2012 |
Awards
Granted Year Ended February 28, 2011 |
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| Shares
and Shares Underlying Awards |
Weighted Average Per Share Award Fair Value |
Shares
and Shares Underlying Awards |
Weighted Average Per Share Award Fair Value |
Shares
and Shares Underlying Awards |
Weighted Average Per Share Award Fair Value |
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Stock options |
114,361 | $ | 15.16 | 51,563 | $ | 15.41 | 83,891 | $ | 17.32 | |||||||||||||||
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Service-based shares and share units |
2,471,872 | $ | 54.62 | 2,148,070 | $ | 45.35 | 2,542,479 | $ | 37.98 | |||||||||||||||
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Performance-based shares and share units—Maximum |
613,800 | $ | 52.23 | 633,336 | $ | 43.60 | 626,672 | $ | 29.31 | |||||||||||||||
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Total share-based awards |
3,200,033 | $ | 52.75 | 2,832,969 | $ | 44.41 | 3,253,042 | $ | 35.78 | |||||||||||||||
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The following summarizes share-based compensation expense recognized in the Company’s Consolidated Financial Statements for the years ended February 28, 2013, February 29, 2012 and February 28, 2011 (in thousands):
| Year Ended February 28, 2013 |
Year Ended February 29, 2012 |
Year Ended February 28, 2011 |
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Cost of revenue |
$ | 9,433 | $ | 7,880 | $ | 6,053 | ||||||
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Sales and marketing |
32,906 | 25,060 | 18,971 | |||||||||
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Research and development |
29,647 | 21,570 | 15,639 | |||||||||
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General and administrative |
26,712 | 24,757 | 19,934 | |||||||||
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Total share-based compensation expense |
$ | 98,698 | $ | 79,267 | $ | 60,597 | ||||||
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Share-based compensation expense qualifying for capitalization was insignificant for each of the Company’s fiscal years ended February 28, 2013, February 29, 2012 and February 28, 2011. Accordingly, no share-based compensation expense was capitalized during these years.
Estimated annual forfeitures—An estimated forfeiture rate of 10.0% per annum, which approximates the Company’s historical rate, was applied to options and service-based share awards. Awards are adjusted to actual forfeiture rates at vesting. The Company reassesses its estimated forfeiture rate annually or when new information, including actual forfeitures, indicate a change is appropriate.
Stock Options
The 2004 Plan provides that the purchase price per share for each option shall not be less than the fair market value of the underlying share on the date of grant. Options granted under the 2004 Plan to date include contract terms of five years and generally vest 25% upon completion of one full year of service and 6.25% on the first day of each subsequent three-month period of service. The maximum contract term for an option granted under the 2004 Plan is seven years from the date of grant.
The total fair value of stock options recognized in the Consolidated Financial Statements for the years ended February 28, 2013, February 29, 2012 and February 28, 2011 was as follows (in thousands):
| Year Ended February 28, 2013 |
Year Ended February 29, 2012 |
Year Ended February 28, 2011 |
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Total fair value of stock options recognized |
$ | 2,791 | $ | 3,104 | $ | 6,038 | ||||||
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The following table summarizes the activity for the Company’s stock options for the years ended February 28, 2013, February 29, 2012 and February 28, 2011:
| Shares
Underlying Options |
Weighted Average Exercise Price Per Share |
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Outstanding at February 28, 2010 |
9,224,309 | $ | 13.03 | |||||
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Granted |
83,891 | 33.59 | ||||||
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Exercised |
(7,071,001 | ) | 11.94 | |||||
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Forfeited |
(207,711 | ) | 19.25 | |||||
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Outstanding at February 28, 2011 |
2,029,488 | $ | 16.88 | |||||
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Granted |
51,563 | 45.08 | ||||||
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Exercised |
(1,059,191 | ) | 15.87 | |||||
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Forfeited |
(123,618 | ) | 17.16 | |||||
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Assumed (1) |
204,911 | 1.13 | ||||||
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Outstanding at February 29, 2012 |
1,103,153 | $ | 16.21 | |||||
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Granted |
114,361 | 55.17 | ||||||
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Exercised |
(735,086 | ) | 15.61 | |||||
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Forfeited |
(29,741 | ) | 25.10 | |||||
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Outstanding at February 28, 2013 |
452,687 | $ | 26.43 | |||||
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| (1) | Amount represents partially vested options assumed as part of a business combination. |
As described above, options are typically granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. No options were granted by the Company during the three years ended February 28, 2013 with exercise prices less than the grant date fair value of the Company’s common stock.
The following summarizes information, as of February 28, 2013, about the Company’s outstanding and exercisable stock options:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
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Exercise Prices |
Number Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Number Exercisable |
Weighted Average Exercise Price |
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$0.00 – $10.00 |
149,625 | 4.9 | $ | 3.30 | 87,916 | $ | 4.18 | |||||||||||||
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$10.01 – $20.00 |
85,401 | 1.2 | $ | 15.65 | 85,127 | $ | 15.64 | |||||||||||||
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$20.01 – $30.00 |
35,551 | 1.6 | $ | 27.24 | 28,303 | $ | 27.01 | |||||||||||||
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$30.01 – $40.00 |
29,664 | 2.6 | $ | 39.45 | 15,083 | $ | 39.52 | |||||||||||||
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$40.01 and over |
152,446 | 4.3 | $ | 52.44 | 12,505 | $ | 45.06 | |||||||||||||
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Total |
452,687 | 3.6 | $ | 26.43 | 228,934 | $ | 15.83 | |||||||||||||
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The following summarizes the intrinsic value, as of February 28, 2013, of the Company’s outstanding, exercisable and expected to vest stock options:
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Intrinsic Value of Stock Options |
Number
of Stock Options |
Weighted
Average Remaining Contractual Life |
Intrinsic Value at February 28, 2013 (in thousands) |
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Outstanding |
452,687 | 3.6 | $ | 11,527,364 | ||||||||
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Exercisable |
228,934 | 2.0 | $ | 8,010,217 | ||||||||
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Expected to vest (assuming annual forfeiture rate of 10%) |
203,026 | 5.2 | $ | 3,641,216 | ||||||||
The intrinsic value of stock options exercised during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 was as follows (in thousands):
| Year Ended February 28, 2013 |
Year Ended February 29, 2012 |
Year Ended February 28, 2011 |
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Total intrinsic value of stock options exercised |
$ | 29,598 | $ | 31,736 | $ | 161,796 | ||||||
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As of February 28, 2013, compensation cost related to unvested stock options not yet recognized in the Company’s Consolidated Financial Statements totaled $4.8 million. The weighted average period over which these unvested stock options are expected to be recognized is approximately 2.5 years.
The fair values of options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 were estimated on the date of grant using the Black-Scholes-Merton option-pricing model based on the following weighted average assumptions:
| Year Ended February 28, 2013 |
Year Ended February 29, 2012 |
Year Ended February 28, 2011 |
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Expected dividend yield |
— | % | — | % | — | % | ||||||
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Risk-free interest rate |
0.41 | % | 0.61 | % | 0.70 | % | ||||||
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Expected volatility (1) |
38.13 | % | 47.91 | % | 46.84 | % | ||||||
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Expected life (in years) (2) |
3.27 | 3.27 | 3.27 | |||||||||
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Weighted average fair value of options granted during the period |
$ | 15.16 | $ | 15.41 | $ | 17.32 | ||||||
| (1) | The expected volatility rates for options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 were estimated based on an approximate equal weighting of the historical volatility of the Company’s common stock over a period of approximately 3.27 years and the implied volatility of publicly traded options for the Company’s common stock. |
| (2) | The expected term for options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 was determined based on the Company’s historical exercise data. The Company reassesses its estimate of expected term annually or when new information indicates a change is appropriate. |
Service-based Share Awards
Service-based share awards include nonvested shares, nonvested share units and deferred share units granted under the 2004 Plan. Nonvested shares and share units generally vest, subject to continued service to the Company, 25% on the first anniversary of the date of grant and (i) 6.25% on the first day of each subsequent three-month period for nonvested shares and (ii) 25% each year over a four-year period beginning on the date of grant for nonvested share units. Nonvested shares and nonvested share units are generally amortized to expense on a straight-line basis over four years. Deferred share units are awarded to directors and generally vest within one year when issued in lieu of annual share awards or immediately when issued in lieu of cash.
The total fair value of service-based share awards recognized in the Company’s Consolidated Financial Statements for the three years ended February 28, 2013 was as follows (in thousands):
| Year Ended February 28, 2013 |
Year Ended February 29, 2012 |
Year Ended February 28, 2011 |
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Total fair value of service-based awards recognized |
$ | 76,460 | $ | 61,818 | $ | 44,050 | ||||||
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The following table summarizes the activity for the Company’s service-based share awards for the years ended February 28, 2013, February 29, 2012 and February 28, 2011:
| Nonvested Shares and Share Units |
Weighted
Average Grant-date Fair Value |
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Service-based share awards at February 28, 2010 |
5,784,926 | $ | 21.03 | |||||
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Granted |
2,542,479 | 37.98 | ||||||
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Vested |
(1,800,281 | ) | 20.43 | |||||
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Forfeited |
(733,786 | ) | 21.52 | |||||
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Service-based share awards at February 28, 2011 |
5,793,338 | $ | 28.60 | |||||
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Granted |
2,148,070 | 45.35 | ||||||
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Vested |
(2,162,667 | ) | 25.78 | |||||
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Forfeited |
(431,900 | ) | 32.22 | |||||
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Assumed (1) |
139,798 | 43.34 | ||||||
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Service-based share awards at February 29, 2012 |
5,486,639 | $ | 36.36 | |||||
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Granted |
2,471,872 | 54.62 | ||||||
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Vested |
(2,184,588 | ) | 31.33 | |||||
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Forfeited |
(580,490 | ) | 41.56 | |||||
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Service-based share awards at February 28, 2013 |
5,193,433 | $ | 46.59 | |||||
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| (1) | Amount represents partially vested share awards assumed as part of a business combination. |
The following summarizes the intrinsic value, as of February 28, 2013, of the Company’s service-based awards outstanding and expected to vest:
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Intrinsic Value of Service-based Awards |
Number
of Shares and Share Units |
Weighted
Average Remaining Vesting Period |
Intrinsic Value at February 28, 2013 (in thousands) |
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Outstanding |
5,193,433 | 1.6 | $ | 263,878 | ||||||||
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Expected to vest (assuming annual forfeiture rate of 10%) |
4,379,416 | 1.6 | $ | 222,518 | ||||||||
The intrinsic value of service-based awards vesting during the three years ended February 28, 2013 was as follows (in thousands):
| Year Ended February 28, 2013 |
Year Ended February 29, 2012 |
Year Ended February 28, 2011 |
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Total intrinsic value of service-based awards vesting |
$ | 118,299 | $ | 96,536 | $ | 70,493 | ||||||
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As of February 28, 2013, compensation cost related to service-based share awards not yet recognized in the Company’s Consolidated Financial Statements totaled $207.8 million. The weighted average period over which these nonvested awards are expected to be recognized is approximately 2.9 years.
Performance-based Share Awards
Under the 2004 Plan, certain executive officers and senior management were awarded a target number of performance share units (“PSUs”). The PSU payouts are either based on (i) the Company’s financial performance (“performance condition”) or (ii) the performance of the Company’s common stock (“market condition”). Set forth below are general descriptions of the two types of performance-based awards granted to certain members of senior management:
PSUs with Performance Conditions
Depending on the Company’s financial performance relative to the financial performance of specified peer companies, PSU grantees may earn up to 200% of the target number of PSUs (the “Maximum PSUs”) over a performance period with three separate performance segments corresponding to three fiscal years of the Company. Up to 25% of the Maximum PSUs may be earned in respect of the first performance segment; up to 50% of the Maximum PSUs may be earned in respect of the second performance segment, less the amount earned in the first performance segment; and up to 100% of the Maximum PSUs may be earned in respect of the third performance segment, less the amount earned in the first and second performance segments.
PSUs with Market Conditions
Depending on the performance of the Company’s common stock over a performance period of approximately three years, PSU grantees may earn up to 200% of the target number of PSUs. The number of PSUs earned is determined based on a comparison of the performance of the Company’s stock price relative to the performance of the stock price of specified peer companies during the performance period. Each grantee will receive a number of shares of common stock equal to the number of PSUs earned in a single payout following the end of the performance period.
The following table summarizes the activity for the Company’s PSUs for the years ended February 28, 2013, February 29, 2012 and February 28, 2011:
| Maximum | ||||||||
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Activity |
Shares Underlying Performance Share Units |
Weighted Average Grant Date Fair Value |
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Outstanding at February 28, 2010 |
1,273,668 | $ | 20.94 | |||||
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Granted |
626,672 | $ | 29.31 | |||||
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Vested |
(451,725 | ) | $ | 21.35 | ||||
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Forfeited |
(18,610 | ) | 21.00 | |||||
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Outstanding at February 28, 2011 |
1,430,005 | $ | 24.48 | |||||
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Granted |
633,336 | $ | 43.60 | |||||
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Vested |
(337,734 | ) | $ | 23.98 | ||||
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Forfeited |
— | — | ||||||
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Outstanding at February 29, 2012 |
1,725,607 | $ | 31.60 | |||||
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Granted |
613,800 | $ | 52.23 | |||||
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Vested |
(634,384 | ) | $ | 23.62 | ||||
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Forfeited |
(200,353 | ) | $ | 32.81 | ||||
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Outstanding at February 28, 2013 |
1,504,670 | $ | 43.22 | |||||
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| (1) | Vested and forfeited amounts represent the actual number of shares vesting and forfeited during the year. Outstanding represents the remaining maximum potential shares available to vest as of the period ended. |
The total fair value of performance-based share awards recognized in the Company’s Consolidated Financial Statements for the three years ended February 28, 2013 was as follows (in thousands):
| Year Ended February 28, 2013 |
Year Ended February 29, 2012 |
Year Ended February 28, 2011 |
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Total fair value of performance-based awards recognized |
$ | 19,447 | $ | 14,345 | $ | 10,509 | ||||||
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The total intrinsic value of performance-based share awards vesting during the three years ended February 28, 2013 was as follows (in thousands):
| Year Ended February 28, 2013 |
Year Ended February 29, 2012 |
Year Ended February 28, 2011 |
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Total intrinsic value of performance-based awards vesting |
$ | 37,872 | $ | 16,032 | $ | 13,904 | ||||||
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As of February 28, 2013, the number of shares subject to PSU awards expected to vest was 1.1 million shares. Compensation expense related to PSUs expected to vest but not yet recognized in the Consolidated Financial Statements totaled $18.8 million as of February 28, 2013. The weighted average period over which these awards are expected to be recognized is approximately 2.1 years.