Interview with Stride CEO James Rhyu: Disrupting K-12 and Beyond

0:05The 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.

0:30That 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. Motley Fool CEO, Tom Gardner, and Motley Fool analyst, Sanmik Dale, 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 a emerging online learning platform that i think you're going to find very very interesting james welcome to the uh 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 strides why you know how is it kind of evolving beyond just like an online k-12 school provider 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.

1:35education 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, 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. 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.

2:21It'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, sort of other factors that here in the US we have not. And so I think we, K-12 strides our corporate name, K-12 is more of our brand name.

3:07I think we can really play a part in disrupting K-12 education in a very positive way for an industry that I think is really right for and needs disruption. Get a concise daily market preview from Charles Schwab, including stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Schwab Market Update is an original podcast from Charles Schwab. Join host Keith Lansford for this information-packed daily market preview delivered in 10 minutes or less. Listen today at schwab.com slash market update podcast, or wherever you get your podcasts.

3:47That's schwab.com slash market update podcast. Can you talk to us about the numbers, uh, for stride, the number of schools, uh, the number of students just to give us perspective, the, the, the reach across the country, uh, in different regions, et cetera. So we have, uh, So this year, we sort of measure ourselves by fall enrollments just because, you know, school starts in the fall. We actually grew through this past year. Our fiscal year just ended in June. 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.

4:22So 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. We operate in a little 30, 31 states, plus the District of Columbia. We cover about two-thirds of the school-age kids in the country with our programs. You know, so I think we still have some more penetration opportunity.

5:11But I think more than that, actually, if we never got into another state, you know, I think what we saw pre-pandemic was that for our core business, which is full-time virtual programs, which 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%. 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%.

5:57And 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 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 largely as a monopoly.

6:39There'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. There's a long, I think, history in our country and others of monopolies and how they operate and how they think about customers. I think that there's a big opportunity for us to sort of turn the tables a little bit. Three quotations for you to respond to. You'll catch the theme right away.

7:20Sal Khan, AI will transform education by providing every student with a virtual personalized tutor at an affordable cost. the CEO of Duolingo, Luis Van An, 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-12 education.

8:05And there's a somewhat practical reason for that, which is custodial. What I think people don't realize is that one of the bigger responsibilities that our K-12 education has in our society is actually custodial. We have a lot of families where both parents work or single-parent families where the adult in the house has to go to work. And so the system plays a custodial aspect. And 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 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.

8:58And, 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, you know, they all have some error rate metric, right? So credit loss, inventory shrink, there's some error rate, what I'm calling sort of error rate metric. And it just so happens, I think if you look, 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 to around 2%.

9:34It 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. So there's an error rate. 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 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.

10:21I 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 equation that we don't recognize is if you're a teacher in a classroom of 30, 40 kids, the ability to really deliver a personalized, empathetic relationship to a student is very challenged just because of the diversity of children you're trying to manage in any given moment. whereas technology is going to be to help say good morning Tom, how are you feeling and if Tom says 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 why don't you watch this three minute video and get your blood flowing a little bit we'll do a little stretching that will sort of help you get going in the morning.

11:28And it can do that individually for 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, you know, I'm not going to, 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 compliment to our system and our teachers, if not be able to, you know, replace or or help replace them.

12:16Please feel free to answer this question as an athlete or celebrity might in the third person singular uh 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 yeah i like to tell people i was a c student so you know going into education was never sort of going to be never going to be my jam you You know, I had a very personal situation where, you know, both my parents have now passed. But when each of them, you know, was diagnosed with some illness, I had an opportunity to relocate to be closer to them and spend some time with them in their last years.

13:00And that's exactly what happened in this case. And so, you know, it was really my dad 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.

13:36And, 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. You know, I was a very happy accountant, I guess. And I really enjoyed that job. And but but, you know, it's turned out, I think, pretty well. And, you know, the thing that 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.

14:13But 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 the attribute that I tend to focus a lot on. You know, I tell people a lot that I'm an early person. 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.

14:47And I think that the only way you can really answer that question well is if you have self-awareness. And I think just self-awareness, it just drives so many of 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 helps me hire people. Like, so who am I going to index in hiring and what kind of characteristics am I looking to hire? And, you know, where do I spend my time? Like I should spend my time in things where I can add value as opposed to the things I stink at, you know? And so, you know, I think that self-awareness for me as a leader is, you know, is what I really encourage everybody.

15:27And it's, you know, it's hard because people um i think people just naturally they don't want to be honest with themselves you know it's just it's it's hard to let yourself in the mirror you know and really be honest with yourself and um and that's you know i try to do that i'm sure i'm i'm not doing a good job of that that i can i could do but um it's what i really encourage all the leaders around me to to really do and um you know goes and 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.

16:02So if I'm going to mentor you, we have to do an exercise and figure out what your goals and objectives are. You know, people a lot of things, oh, I want to be the CEO. 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.

16:26My 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, you know, and so, you know, so I think really self-awareness is a characteristic that I value. you. And then the other, the other things that I always say is, you know, I think it's always important to operate with some level of humility and gratitude. You know, I think that, you know, in today's day and age, it's a little bit short supply. And, you know, I think that it's just, and it's just an important characteristic to have about life and, you know, be grateful for what you've got and, you know, try to be humble, you know, CEOs of companies, I think it's, you know, you just, you're always inundated, you know, people are always kissing your ass and you're not like making you feel good about yourself and stuff like that.

17:14So it's just harder to be humble, you know, and I think it's just always reminding yourself that, you know, we all got to start somewhere and there's a lot of humility in that. Support for the show comes from Fundrise. Investing in companies already in the S &P 500 can sometimes feel like you're being served someone else's leftovers. It's still a great meal, but it's hard not to imagine what the food tasted like when it was fresh out of the oven. But with Venture Capital by Fundrise, you can finally get in early and take a seat at the table alongside the biggest names in tech investing. Fundrise's mission is to give investors the access required to invest in the best tech and AI companies before they go public.

17:51Visit Fundrise.com slash fool to check out Fundrise's venture portfolio and start investing in minutes. All investments involve risk, including the potential loss of principle. Past performance is not indicative of future results. This is a paid advertisement. So we're running close to the end of our time, but I would love to ask you, you know do you have a specific like student success story that 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 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.

18:36It's a very atypical one, but I do think it sort of demonstrates the power of the platform and 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 didn't believe that. She was adamant that the child didn't have a learning disability. So she petitioned the school board and doctors, you know, to put the child into the regular classroom.

19:21But 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 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 into one of our programs.

20:16and a couple years ago, 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 range of choices that customers should be able to make for their own children. And it's really, you know, you hear those guys, and in our programs, these stories are like a dime a dozen. There's just incredible stories of family resilience and students, and it's amazing. And you asked me earlier about why I joined and stuff like that, and I really didn't join for any educational reason. But having now been here after a couple years, I think the reason I stay, not the reason I joined, is impact.

21:10The lives that we are able to impact. I just don't know another job that I'm qualified for where I could go to and make this kind of an impact. So it's really it's, you know, 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. and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers.

21:50Advertisements 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.

22:09You