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Stock-based Compensation | 3 Months Ended
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Dec. 31, 2020
Share Based Compensation Allocation And Classification In Financial Statements [Abstract] |
Stock-Based Compensation | 4. Stock-based Compensation Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as our principal equity incentive awards, including performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock. For performance-based awards, we recognize stock-based compensation based on expected achievement of performance criteria. We measure the cost of employee services received in exchange for RSU awards based on the fair value of the RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. We account for forfeitures as they occur, rather than estimate expected forfeitures. Our employee stock purchase plan (ESPP) allows eligible employees to contribute up to 10% of their base salary, up to a maximum of $25,000 per year and subject to other plan limitations, toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The ESPP is qualified under Section 423 of the Internal Revenue Code. We estimate the fair value of each purchase right under the ESPP on the date of grant using the Black-Scholes option valuation model and use the straight-line attribution approach to record the expense over the six-month offering period. The following table shows restricted stock unit activity for the three months ended December 31, 2020:
(in thousands, except grant date fair value data) |  | Number of RSUs |  |  | Weighted-Average Grant Date Fair Value Per RSU |
Balance of outstanding restricted stock units, October 1, 2020 |  |  | 3,509 |  |  | $ | 79.13 |
Granted(1) |  |  | 925 |  |  | $ | 100.20 |
Vested |  |  | (801 | ) |  | $ | 79.41 |
Forfeited or not earned |  |  | (36 | ) |  | $ | 78.79 |
Balance of outstanding restricted stock units, December 31, 2020 |  |  | 3,597 |  |  | $ | 84.61 |
(1) | Restricted stock granted includes 33,000 shares from prior period TSR awards that were earned upon achievement of the performance criteria and vested in November 2020.
(in thousands) |  | Restricted Stock Units |
Grant Period |  | Performance- based RSUs(1) |  |  | Service-based RSUs(2) |  |  | Total Shareholder Return RSUs(3) |
First three months of 2021 |  |  | 90 |  |  |  | 712 |  |  |  | 90 |
(1) | The performance-based RSUs were granted to our executives and are eligible to vest based upon annual increasing performance measures over a three-year period. To the extent earned, those performance-based RSUs will vest in three substantially equal installments on November 15, 2021, November 15, 2022 and November 15, 2023, or the date the Compensation Committee determines the extent to which the applicable performance criteria have been achieved for each performance period. Up to a maximum of two times the number of RSUs can be earned (a maximum aggregate of 179 thousand RSUs).
(2) | The service-based RSUs were granted to employees, including our executive officers. Substantially all service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.
(3) | The Total Shareholder Return RSUs (TSR RSUs) were granted to our executives pursuant to the terms described below.
The number of TSR RSUs that vest over the three-year period will be determined based on the performance of PTC stock relative to the stock performance of an index of PTC peer companies established as of the grant date, as determined at the end of three measurement periods ending on September 30, 2021, 2022 and 2023, respectively. The RSUs earned for each period will vest on November 15 following each measurement period, up to a maximum of two times the number of TSR RSUs eligible to be earned for the period (up to a maximum aggregate of 179 thousand RSUs). No vesting will occur in a period unless an annual threshold requirement is achieved. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the TSR RSUs will vest for the measurement period. The weighted-average fair value of the TSR RSUs was $124.04 per target RSU on the grant date. The fair value of the TSR RSUs was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the historical volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate. The significant assumptions used in the Monte Carlo simulation model were as follows:
Average volatility of peer group |  |  | 41.5 | %
Risk free interest rate |  |  | 0.21 | %
Dividend yield |  |  | — | %
Compensation expense recorded for our stock-based awards is classified in our Consolidated Statements of Operations as follows:
(in thousands) |  | Three months ended |
|  | December 31, 2020 |  |  | December 28, 2019 |
Cost of license revenue |  | $ | 20 |  |  | $ | — |
Cost of support and cloud services revenue |  |  | 2,302 |  |  |  | 1,486 |
Cost of professional services revenue |  |  | 2,112 |  |  |  | 1,557 |
Sales and marketing |  |  | 14,999 |  |  |  | 7,452 |
Research and development |  |  | 8,443 |  |  |  | 6,932 |
General and administrative |  |  | 18,212 |  |  |  | 10,509 |
Total stock-based compensation expense |  | $ | 46,088 |  |  | $ | 27,936 |
Stock-based compensation expense includes $1.9 million in the first quarter of 2021 and $1.5 million in the first quarter of 2020 related to the ESPP.

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