Note

– Stock-Based Compensation

The Company has

two

equity incentive plans: the

2000

Stock Option Plan (

2000

Plan) and the

2012

Long-Term Incentive Plan (

2012

Plan). Upon the adoption of the

2012

Plan on

February

21,

2012,

all shares that were reserved but

not

issued under the

2000

Plan were assumed by the

2012

Plan.

additional awards will be issued under the

2000

Plan. Under the

2012

Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, performance stock, stock units, other stock-based awards and cash incentive awards. Awards under the

2012

Plan have a maximum term of

ten

years from the date of grant. The compensation committee of the board of directors

may

provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements, and the compensation committee will determine whether such measures have been achieved. The per share exercise price of stock options and SARs granted under the

2012

Plan generally

may

not

be less than the fair market value of a share of our common stock on the date of the grant. Restricted stock is valued at fair market value on the date of grant.

The Company’s

2012

Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock at a discount through payroll deductions of up to

percent of their eligible compensation, subject to plan limitations. The ESPP provides for

six

-month offering periods with a single purchase period, and at the end of each offering period, employees are able to purchase shares at

percent of the lower of the fair market value of the Company’s common stock on the

first

trading day of the offering period or on the last trading day of the offering period. The Company determines the fair value stock-based compensation related to its ESPP in accordance with ASC

718

using the component measurement approach and the Black-Scholes standard option pricing model.

Employees purchased

33,562

and

41,307

shares of common stock under the ESPP at an average exercise price of

$85.61

and

$48.91

during

2018

and

2017,

respectively. As of

December 31, 2018,

1,210,445

shares remained available for future issuance under the ESPP.

The Company determines its stock-based compensation in accordance with ASC

718,

which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on fair value.

Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-based compensation expense is calculated using the Company’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include its expected term and stock price volatility.

The expected term of stock options is estimated from the vesting period of the award and represents the weighted average period that the Company's stock options are expected to be outstanding. The Company estimates the volatility of its stock price based on the historic volatility of its common stock. The Company bases the risk-free interest rate that it uses in the Black-Scholes option pricing model on U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The Company has never paid and does

not

anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an expected dividend yield of

zero

in the option pricing model. The Company accounts for forfeitures as they occur. The Company allocates stock-based compensation expense on a straight-line basis over the requisite service period.

The following table summarizes stock-based compensation expense for the years ended

December

31,

2018,

2017

and

2016,

respectively:


	Year Ended December 31,
(in thousands)	2018		2017		2016

Stock options and other	$	10,113	$	7,954	$	6,177
Employee stock purchase plan		815		604		598
Total stock-based compensation expense	$	10,928	$	8,558	$	6,775

Cost of revenue	$	1,543	$	970	$	691
Operating expenses:
Marketing and sales		1,942		1,429		977
Research and development		1,517		1,091		1,396
General and administrative		5,926		5,068		3,711
Total stock-based compensation expense	$	10,928	$	8,558	$	6,775

Stock Options

The following table provides the assumptions used in the Black-Scholes option pricing model for the years ended

December

31,

2018,

2017

and

2016:


	Year Ended December 31,
	2018	2017	2016

Risk-free interest rate	2.52 - 3.07%	2.24 - 2.36%	1.53 - 2.68%
Expected life (years)	6.25	6.50	6.50
Expected volatility	41.68 - 42.22%	42.68 - 44.68%	44.38 - 45.93%
Expected dividend yield	0%	0%	0%
Weighted average grant date fair value	$50.08	$32.26	$26.61

The following table summarizes stock option activity and the weighted average exercise price for the years ended

December

31,

2018,

2017

and

2016:


				Weighted-
				Average
	Stock Options			Exercise Price

Options outstanding at January 1, 2016		766,042		$	36.52
Granted		117,480			57.99
Exercised		(226,164	)		16.65
Cancelled		(87,719	)		61.41
Options outstanding at December 31, 2016		569,639			45.00
Granted		60,100			69.06
Exercised		(187,313	)		35.93
Cancelled		(43,371	)		61.02
Options outstanding at December 31, 2017		399,055			51.13
Granted		36,600			110.59
Exercised		(155,765	)		38.92
Cancelled		(27,274	)		74.35
Options outstanding at December 31, 2018		252,616		$	64.71

Exercisable at December 31, 2018		125,925		$	53.02

The outstanding options have a term of

years. For employees, options that have been granted become exercisable ratably over the vesting period, which is generally a

four

- or

five

-year period, beginning on the

first

anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, options generally become exercisable in full on the

first

anniversary of the grant date.

The total intrinsic value of options exercised during the years ended

December

31,

2018,

2017

and

2016,

was

$13.0

million,

$7.0

million and

$11.1

million, respectively. The aggregate intrinsic value represents the cumulative difference between the fair market value of the underlying common stock and the option exercise prices.

For options outstanding at

December 31, 2018,

the weighted-average remaining contractual term was

5.7

years and the aggregate intrinsic value was

$12.2

million. For options exercisable at

December 31, 2018,

the weighted-average remaining contractual term was

3.5

years and the aggregate intrinsic value was

$7.5

million. Refer to the table below for additional information.

The following table summarizes information about stock options outstanding at

December

31,

2018:


	Options Outstanding, Vested and Expected to Vest						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price ($)		Number Exercisable		Weighted Average Exercise Price ($)

$3.67 to $31.43		30,972		2.95		24.59		30,972		24.59
$31.44 to $66.87		133,492		5.36		58.52		69,210		58.78
$66.88 to $96.20		51,894		5.55		72.49		25,743		71.73
$96.21 to $123.10		36,258		9.23		110.59		0		0.00

The fair value of share-based payment transactions is recognized in the consolidated statements of comprehensive income. As of

December

31,

2018,

there was

$3.3

million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of

2.8

years. The total fair value of options vested was

$1.5

million,

$2.8

million and

$3.6

million for the years ended

December

31,

2018,

2017

and

2016,

respectively.

Restricted Stock

The

2012

Plan provides for the award of restricted stock or restricted stock units. Restricted stock awards are share settled and restrictions lapse ratably over the vesting period, which is generally a

four

- or

five

-year period, beginning on the

first

anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, restrictions generally lapse in full on the

first

anniversary of the grant date.

The following table summarizes restricted stock activity for the years ended

December 31, 2018,

2017

and

2016:


				Weighted-
				Average
				Grant Date
	Restricted			Fair Value
	Stock Awards			Per Share

Restricted stock at January 1, 2016		124,393		$	68.97
Granted		161,555			59.37
Restrictions lapsed		(41,415	)		67.78
Forfeited		(29,428	)		63.23
Restricted stock at December 31, 2016		215,105			62.78
Granted		210,744			63.70
Restrictions lapsed		(60,102	)		63.60
Forfeited		(30,916	)		61.99
Restricted stock at December 31, 2017		334,831			63.29
Granted		106,855			115.41
Restrictions lapsed		(86,191	)		63.64
Forfeited		(31,574	)		68.67
Restricted stock at December 31, 2018		323,921		$	79.85

As of

December 31, 2018,

there was

$20.7

million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of

3.1

years.

Performance Stock

Performance Stock Units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between

percent and

150

percent of that target number capable of being earned and vesting at the end of a

three

-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment.

The following table summarizes performance stock activity for the years ended

December 31, 2018,

2017

and

2016:


			Weighted-
			Average
			Grant Date
	Performance		Fair Value
	Stock Awards		Per Share

Performance stock at January 1, 2016		-	$	-
Granted		-		-
Restrictions lapsed		-		-
Forfeited		-		-
Performance stock at December 31, 2016		-		-
Granted		25,707		58.35
Restrictions lapsed		-		-
Forfeited		-		-
Performance stock at December 31, 2017		25,707		58.35
Granted		20,006		105.75
Restrictions lapsed		-		-
Performance assumption change		6,427		58.35
Forfeited		-		-
Performance stock at December 31, 2018		52,140	$	76.54

As of

December 31, 2018,

there was

$2.2

million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of

1.8

years.

Employee Stock Purchase Plan

The following table presents the assumptions used to estimate the fair value of the ESPP during the years ended

December

31,

2018,

2017

and

2016:


	Year ended December 31,
	2018	2017	2016

Risk-free interest rate	2.06 - 2.33%	0.97 - 1.48%	0.56 - 0.59%
Expected life (months)	6.00	6.00	6.00
Expected volatility	31.50 - 37.36%	24.49 - 34.51%	39.51 - 49.13%
Expected dividend yield	0%	0%	0%