Motley Fool Hidden Gems Investing - Interview with Stride CEO James Rhyu: Disrupting K-12 and Beyond

Starting point is 00:00:00 The combination of industries that are not producing the outcomes that it needs to and that are ripe for disruption, you know, that haven't yet been disrupted or significantly disrupted, I'm pretty sure K-12 education is either at or near the top of the list. I can't think of that many large-scale industries like this. That was James Rue, CEO of Stride. I'm Motley Fool producer Matt Greer. Now, Stride is a for-profit education company that provides online and blended education programs. The programs range from K through 12 through career certification and training.

Starting point is 00:00:47 Motley Fool CEO Tom Gardner and Motley Fool analyst Sanmeet Deo recently had a chance to talk with James Rue about opportunity, disruption, AI, and leadership. Good afternoon, fools, and welcome to a fantastic interview we have lined up here for you. We have James Rue of Stride, Inc. It's an emerging online learning platform that I think you're going to find very, very interesting. James, welcome to the show, and thanks for coming on. Thanks for having me. Really quickly, you know, just to kick things off, you know, what is Stride's why? You know, how is it kind of evolving beyond just like an online K-12 school provider?

Starting point is 00:01:25 Yeah, I mean, I think the basic premise I take a look at the company at is from the lens of K-12 education in the U.S., and we're predominantly a U.S. education provider. So the K-12 education space in the U.S. is almost an $800 billion market, so very large market, obviously. But I think more importantly, if you think about in this country the combination of industries that are not producing the outcomes that it needs to and that are ripe for disruption, that haven't yet been disrupted or significantly disrupted, I'm pretty sure K-12 education is either at or near the top of the list. I can't think of that many large scale industries like this, you know, and I think it's no surprise to anybody that our education system has been from a competitive landscape across the world on a decline. It's been on a multi-decade decline. And so, you know, you combine the factors that it's been on this decline and there's really not been significant disruption introduced into the system, i.e. it's been basically run the same way for 50, 60, 70 years. And then you look at other systems and you look at how progressive other systems are and the results that other systems are getting. When I say other systems, other countries. And predominantly, those other countries, they embrace technology disruption, you know, sort of other factors that here in the U.S. we have not.

Starting point is 00:03:01 And so, you know, I think we, K-12 strides our corporate name, K-12 is more of our brand name. I think we can, you know, really play a part in disrupting K-12 education in a very positive way, you know, for an industry that I think is really right for and needs disruption. And what better way than with a delicious Pratt Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try Pratt first at A&W. At participating A&W locations in Ontario. Can you talk to us about the numbers for Stride, the number of schools, the number of students? just to give us perspective, the reach across the country in different regions, et cetera? So we have this year, we sort of measure ourselves by fall enrollment just because,

Starting point is 00:04:09 you know, school starts in the fall. We actually grew through this past year. Our fiscal year just ended in June. But so we grew through the year. But I'll sort of refer just back to the fall numbers because everybody's now anticipating this fall's numbers and sort of what we're going to do this fall. So last fall, we were 222,000 enrollments, so about close to a quarter million enrollments. K-12 school age population in the U.S., about 55 million kids. So, you know, very, very low penetration. Five years ago, I became the CEO four and a half years ago. So five years ago, we did about half that, a little less than half that. Our revenues for this past year, about 2.4 billion. Uh, we operate in a little 30, 31 states, uh, plus the district of Columbia. We,

Starting point is 00:04:57 um, we cover about two thirds of the school age kids in the country with our programs. Um, you know, so, uh, so I think we still have some more penetration, uh, opportunity, but I think more than that, actually, um, if, if we never got into another state, uh, you know, I think what we saw pre-pandemic was that for our core business, which is full-time virtual programs with, I think you sort of referenced earlier, we saw sort of this, you know, flattening of the demand curve at about 2%. So, you know, you sort of see over, you know, we opened a program in a state and over the first sort of 10 years or so, you know, you see an increase in penetration that then sort of flattened out at 2%.

Starting point is 00:05:43 And since the pandemic, what we've seen is that we've hit sort of the inflection of the S-curve, you know, where that penetration is now in many states surpassing and increasing well past the 2%. And so, you know, if you look at a state like California or Texas, huge states that already have penetrations well below that 2%, you know, we think that there is just a tremendous amount of room to run still with our current footprint, even if we didn't expand our footprint. Now, I think that ultimately we will expand our footprint. I think, you know, it's one of those things where customer demand just becomes, I think, so overwhelming at some point that

Starting point is 00:06:23 state government, state legislatures, they sort of can't resist succumbing to the pressure of, you know, if you think about the way that most school districts operate in most municipalities, You know, it operates large as a monopoly. There's really no other option. And again, you know, if you think about disruption, there's not really that many monopoly type situations that aren't in need of some disruption. So, you know, if you sort of think of the analogy that most school districts operate as a monopoly and monopolies tend not to embrace change, technology, et cetera, you know, there's a long, I think, history in our country and others of monopolies and how they operate and how they think about customers. You know, I think that there's a big opportunity for us to, you know, sort of turn the tables a little bit. Three quotations for you to respond to. You'll catch the theme right away. Sal Khan, AI will transform education by providing every student with a virtual personalized tutor

Starting point is 00:07:24 at an affordable cost. The CEO of Duolingo, Louise Von Ahn, education is going to change. It's just a lot more scalable to teach with AI than with teachers. And Bill Gates, perhaps that famous quote that people read a few months ago, within 10 years, AI will replace many doctors and teachers, humans won't be needed for most things. So what is James Rue's view of the impact of AI on education? I think in the short and medium term, I think just our societal norms will dictate that teachers remain at the center of K through 12 education. And there's a somewhat practical reason for that, which is custodial. What I think people don't realize is that one of the bigger um responsibilities that our k-12 education has in our society is actually custodial

Starting point is 00:08:17 we have a lot of uh families that have uh where both parents work or single parent you know families where the the the adult in the house has to go to work and so uh so the system plays a custodial aspect and um i don't think in the short and medium term that ai will be able to both play the educator as well as the custodian. I think that's, I don't see that happening in the short to medium term. I am bullish in the longer term that technology can play a much bigger part in our kids' education. And, you know, I think that almost the easiest way to look at it is if you look at error rates, right? This is, you know, you guys probably know this a lot better than I do. But, you know, if you look across industry, financial services or retail or whatever,

Starting point is 00:09:10 you know, they all have some error rate metric, right? So credit loss, you know, inventory shrink, you know, there's some error rate, you know, what I'm calling sort of error rate metric. And it just so happens, I think if you look, you know, you guys are more experts at this than I am probably, but I think if you look across a broad swath of industries, that error rate tends to migrate for some reason or another, are around 2%. It seems like a sort of natural error rate that a lot of industries sort of find acceptable, if you will. And I think that what education will have the benefit of, and I think, by the way, you will find in education the same thing. By the way, teachers, as great as they are and as great a service as they provide, teachers are not perfect,

Starting point is 00:09:55 right? So there's an error rate, you know? And if you sort of assume that it's comparable to other industries, error rates, and it's sort of in the 2% range. I just think technology you're going to find has a much lower error rate. And if you look at like self-driving cars, we know that the error rate in self-driving cars is better than humans. Although the bar that we set for allowing self-driving cars is higher. I think similarly in education, we will probably set a higher bar, but I think technology ultimately will cross that bar and it'll have lower error rates. It has more consistency. And by the way, it can also have more empathy. See, I think part of the part of the of the equation that we don't recognize is if you're a teacher in a classroom

Starting point is 00:10:39 of 30, 40 kids, the ability to really deliver a personalized, empathetic relationship to a student is very challenged just because of the, you know, of the of the diversity of children you're trying to manage in any given moment. Whereas technology is going to be able to help say, well, you know, good morning, Tom, how are you feeling? And if Tom says, well, geez, I'm a little tired this morning because I was up late studying my balance sheets. The AI or whatever technology say, oh, well, before we dive into your lesson, you know, why don't you watch this three minute video and get your blood flowing a little bit. We'll do a little stretching, whatever, you know, that uh, will sort of help you get, uh, get going in the morning. And it can do that individually for

Starting point is 00:11:28 each kid, a teacher just, and it's not because they don't want to, they just, they don't have the capacity to do those things. So I do think I'm much more, I'm very bullish on the longer term outlook of technologies, AI robotics, things like that to really deliver an educational experience that is more can, you know, I'm not gonna, I don't know exactly the timeframe, but I think I sort of agree with the first three quotes directionally that over time, you know, technology and AI and robotics will, at a minimum, offer a huge complement to our system and our teachers, if not be able to, you know, replace or help replace them. Please feel free to answer this question as an athlete or celebrity might in the third person singular. It's a few part question. Why did James Rue join Stride? What motivates James Rue going forward and what's one leadership or cultural principle that James Rue holds dear at Stride?

Starting point is 00:12:35 Yeah, I like to tell people I was a C student. So, you know, going into education was never sort of never going to be my jam. You know, uh, it was, I had a very personal situation where, um, you know, both, both my parents have, have now passed, but when each of them, uh, you know, was diagnosed with some illness, uh, I had an opportunity to relocate, uh, to be closer to them and, and, uh, spend some time with them in their last years. And that's exactly what happened in this case. Um, and so, uh, you know, it was really, my dad was, uh, was diagnosed with an illness And, you know, my brother lived, my brother lives in the Virginia area. And, you know, we sort of decided to move him there and, and, and spend time and just just as this was happening, I got a call from an old mentor of mine, Nate, who hired me and, you know, he, he asked me to, to come on board. So it was very serendipitous for me to have joined. And, you know, it's, you know, it's interesting because I, you know, I spent most of my career just sort of just being ambitious, you know, trying to climb the corporate ladder.

Starting point is 00:13:34 And, you know, I had many years ago, I wanted to be, you know, like, my goal was to be the CFO of a public company. And I didn't, I never dreamt or wanted to be the CEO of a company. And in fact, when the, when the board approached me, you know, to consider for me the role, I actually said, I'm not interested for quite a while before I sort of threw my hat into the ring. And, you know, I was a very happy accountant, I guess, and I really enjoyed that job. But, you know, it's turned out, I think, pretty well. And, you know, the thing that I tell people all the time, I actually have these sort of executive attributes that my management team is sort of sick of probably hearing me talk about them all the time. But there are these 10 attributes that I put up all the time that they're in no particular order except for the first one. And the first one is self-awareness. And I think that is the attribute that I tend to focus a lot on. And, you know, I tell people a lot that I'm an early person.

Starting point is 00:14:28 I get up early and I do some reflection almost every day. And, you know, there's one question I ask myself every morning, which is, how can I be better? And you just fill in the blank, right? How can I be a better husband? How can I be a better father? How can I be a better boss? How can I be a better CEO? Whatever the, you know, whatever you fill in the blank with.

Starting point is 00:14:46 And I think that the only way you can really answer that question well is if you have self-awareness. and um and i think just self-awareness is just drives so many of the uh the decisions i make because you know there's some things i'm good at there's a lot of things i stink at right so that self-awareness uh helps me hire people like so who am i going to index some hiring and what kind of characteristics am i looking to hire and you know um where do i spend my time like i should spend my time and things where i can add value as opposed to the things i stink at you know and so So, you know, I think that self-awareness for me as a leader is, you know, is what I really encourage everybody. And, you know, it's hard because people, I think people just naturally they don't want to be honest with themselves.

Starting point is 00:15:31 You know, it's just it's hard to look yourself in the mirror, you know, and really be honest with yourself. And that's, you know, I try to do that. I'm sure I'm not doing a good job of that that I can do. But it's what I really encourage all the leaders around me to really do and, you know, goes in. When I mentor people, it's the first thing I spend time with them on because a lot of people, you know, you ask them, well, what are their goals? My big thing is I don't know you, so I don't know what goals and objectives you have. So if I'm going to mentor you, we have to do an exercise and figure out what your real goals and objectives are. And, you know, people, a lot of things, oh, I want to be the CEO.

Starting point is 00:16:07 And I'm like, do you really, like, do you even know what it is to be the CEO? I mean, when I became the CEO, I don't think I had a good idea. And I'm still learning the job almost five years in, you know, and all the, you know, the different pressures that come with the job and things like that. And, you know, it turns out a lot of people when I go through with them, they end up saying that's not the job I want. You know, I have different goals. My goals are, you know, financial in nature. And, you know, you don't need to be the CEO to reach those financial goals, particularly if maybe you've been a stockholder of LRN for a number of years. And, um, you know, and so, um, you know, so I think really self-awareness is, is, is a

Starting point is 00:16:40 characteristic that I, I value. And then the other, the other things that I always say is, um, you know, I, I think it's always important to operate with some level of humility and gratitude. You know, I think that, um, you know, in today's day and age, um, it's a little bit in short supply and, um, you know, I think that, uh, it's just an, it's just an important characteristic to have about life and, you know, be grateful for what you've gotten, you know, try to be humble you know ceos of companies i think it's you know just you're always inundated you know people are always kissing your ass and you know like making you feel good about yourself and stuff

Starting point is 00:17:12 like that so it's just harder to be humble you know and i think it's just just always reminding yourself that you know you know we all got to start somewhere and and there's a lot of humility in that you gotta try breakfast at a w you gotta try breakfast at a w And what better way than with a delicious Pret Organic Coffee, starting with just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. So we're running close to the end of our time, but I would love to see, I would love to ask you, you know, do you have a specific like student success story that kind of illustrates how someone's kind of gone through your platform? and your education system and succeed and done well i mean that must be like a great uh a great

Starting point is 00:18:10 kind of like feedback loop for you guys yeah you should have started that with that question because that would have taken the whole hour i think probably i mean there's yeah i left i left i didn't leave you enough time for that one i guess i'll give you one quick one though which is it's actually the one i tell the most of it's it's not it's a very atypical one but i do think it it sort of demonstrates the power of of the of the platform franchise that we operate there was a mom of a child. The child was not paralyzed, but from the neck down was severely disabled. So it was wheelchair bound. This child was not able to speak. And in addition to the physical disability the child was diagnosed with, the child was also diagnosed with a mental disability. Now the mom

Starting point is 00:18:56 didn't believe that. She was adamant that the child didn't have a learning disability. So she petitioned the school board and the doctors, you know, to put the child into the regular classroom, but she was rejected. And so every day after school, she picked her child up, brought the child home and sat the child in front of a computer and, you know, supplemented the child's education after school. Now, this was over 10 years ago, by the way. So one day, the phone rings and she leaves her child in front of the computer and steps

Starting point is 00:19:32 into the kitchen to take the phone call she was gone for about 10 minutes and in those 10 minutes the child on the computer painstakingly typed out three words those three words I understand everything now if you're a mom and you see those three words after petitioning for so long well she enrolled her child uh, into one of our programs. And a couple of years ago, that trial, I believe that child graduates salutary into the class. And again, not typical, you know, in the traditional sense, but I think representative of just the, uh, the, the, the range of choices that customers should be able to make for their own children. And, um, it's really, you know, you hear those guys and

Starting point is 00:20:28 in, in, in our programs, these stories are like a dime a dozen. It was just like, you know, incredible stories of family resilience and, um, you know, and students and, and it's just, it's amazing. And, um, you know, you asked me earlier about, um, you know, why I joined and stuff like that. And, you know, I, I really, I didn't join for any educational reason, but, but, but having now been here after a couple of years, um, I think the reason I stay, not the reason I joined, is impact. The lives that we are able to impact. I just don't know another job that I'm qualified for

Starting point is 00:21:02 where I could go to and make this kind of an impact. So it really gets you going every day to know that that's what you're doing. That was James Rue, CEO of the education company Stride. The stock trades on the New York Stock Exchange under the ticker LRN. As always, people on the program may have interest in the stocks they talk about,

Starting point is 00:21:27 and The Motley Fool may have formal recommendations for or against, so don't buy or sell stock space solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For The Motley Fool Money team, I'm Matt Greer. Thanks for listening, and we will see you tomorrow.

Starting point is 00:21:53 Thank you for watching.

Motley Fool Hidden Gems Investing - Interview with Stride CEO James Rhyu: Disrupting K-12 and Beyond

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