United states securities and exchange commission

 

Subscription and support revenue increased $34.7 million for the year ended December 31, 2016 primarily due to an increase in the total number of customers, which grew from approximately 1,800 as of December 31, 2015 to well over 2,000 as of December 31, 2016.

Professional services and other revenue increased $3.0 million for the year ended December 31, 2016 primarily due to an increase in new customers discussed above and an increase in the training completion rate.

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Cost of Revenue and Gross Margin

 

		Year Ended December 31,								Change
		2016				2015				Amount				%
		(dollars in thousands)
Cost of revenue:
Subscription and support		$	24,252			$	17,682			$	6,570				37	%
Professional services and other			8,497				6,391				2,106				33
Total cost of revenue		$	32,749			$	24,073			$	8,676				36
Gross margin percentage:
Subscription and support			75	%			72	%
Professional services and other			38				40
Total gross margin			70				67

 

Total cost of revenue increased $8.7 million for the year ended December 31, 2016 primarily due to an increase in employee-related costs, web hosting costs and third-party software license costs, amortization of developed technology and allocated overhead expenses. Total gross margin increased due to the impact of improved leverage of our web hosting costs relative to the growth in subscription and support revenue.

Subscription and support cost of revenue increased $6.6 million for the year ended December 31, 2016 primarily due to an increase in web hosting and third-party software license costs, employee-related costs, amortization of developed technology and allocated overhead expenses. Web hosting and third-party software license costs increased $3.1 million due to the increase in total customers. Employee-related costs increased $2.3 million as we continued to grow our customer support organization to support our customer growth and improve service levels and offerings. Amortization of capitalized software development costs increased $0.6 million due to the continued development of our software platform. Allocated overhead expenses and other insignificant items increased $0.6 million primarily due to higher rent and communication expense and maintenance on our facilities.

Professional services and other costs of revenue increased $2.1 million for the year ended December 31, 2016 primarily due to an increase in employee-related costs and allocated overhead expenses. Employee-related costs increased $1.6 million as we continued to grow our professional services organization to support our customer growth and improve service levels and offerings. Travel and outsider contractor costs increased $0.2 million due to the increase in total customers and demand for training and professional services. Allocated overhead expenses and other insignificant items increased $0.3 million primarily due to higher rent and communication expense and maintenance on our facilities.

Operating Expenses

Sales and Marketing

 

		Year Ended December 31,								Change
		2016				2015				Amount				%
		(dollars in thousands)
Sales and marketing		$	69,991			$	53,459			$	16,532				31	%

 

Sales and marketing expenses increased $16.5 million for the year ended December 31, 2016 primarily due to an increase in employee-related and sales commission costs, expansion of our marketing programs, travel, information technology and allocated overhead expenses. Employee-related and sales commission costs increased $12.6 million as a result of hiring of additional employees domestically and internationally and growth in our customer base. Marketing program costs increased $1.7 million due to continued expansion into international and corporate markets and growth in our annual user conference, InstructureCon. Travel costs increased $0.8 million as we continue to expand our sales and marketing organization and grow our customer base. Information technology expenses increased $0.8 million as we continue to automate our internal systems. Allocated overhead expenses increased $0.6 million primarily due to higher rent and communication expense and maintenance on our facilities.  

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Research and Development

 

		Year Ended December 31,								Change
		2016				2015				Amount				%
		(dollars in thousands)
Research and development		$	35,973			$	24,151			$	11,822				49	%

 

Research and development expenses increased $11.8 million for the year ended December 31, 2016 primarily due to an increase in employee-related costs, information technology, and allocated overhead expenses.  Employee-related costs increased $10.2 million, information technology expenses increased $0.8 million, as we continue to grow our engineering organization to develop new applications and continue to develop additional features for Canvas and Bridge.  Allocated overhead expenses increased $0.4 million primarily due to higher rent and communication expense and maintenance on our facilities.  Outside contractors and other insignificant items increase by $0.4 million primarily due to outsourced development and depreciation on capital equipment.  

General and Administrative

 

		Year Ended December 31,								Change
		2016				2015				Amount				%
		(dollars in thousands)
General and administrative		$	25,542			$	23,482			$	2,060				9	%