Bullish on LRN; fundamentals remain strong despite CEO change and AI concerns.

The first time he was on we talked about Stride. The ticker there is LRN. And we're going to actually end this podcast with a 10 or 15 minutes discussion on Stride, but to give you an idea, I mean I put out the Stride podcast and the number of value investors, focused concentrated value investors who had inbounds asking questions, wanting me to connect to Adam on the heels of that podcast was awesome.

Adam, I think at the end of this podcast, we might do a a quick little update on Stride. The ticker there is LRN, which was the first podcast that we did that people actually I was getting rave reviews.

I got lots of calls from some pretty big funds who are like, "Hey, this is super interesting."

Let's talk about Stride. So, we you came on at the beginning of this year and was it the beginning of this year? I can't even remember at this point or was it end of last year?

One of two. Well, it's not just 10 times earnings. 10 times earnings growing quickly, tailwinds, Modi, very capex light like it had a lot recession resistant, yeah. It has a lot of like going for it, yeah.

Uh so there has been a lot that's happened over the past 7 to 8 months since then, new CEO, earnings, a outage, the stock price is like recently flat since then. Yeah, so the big news that you're you know, talking about is the the CEO kind of left abruptly.

Um there wasn't a lot of and then they they reported there, you know, they they pre-announced their Q4. Um their fiscal year ends in June because they want Q4 to excuse me, their Q1 to line up with the school year.

They get their count date, which is their enrollments. So, they want that to line up with their fiscal first quarter and then that basically predicts it's a very like trans you know, they have a lot of Um they can see the basically you can see the revenue for the rest of the year because it's you know, the student it's the count the students at at the beginning of school year with like the model like some attrition and like they gain some and Um so basically what happened is the CEO left right before Um he'd been there his name is James Rhyu.

He'd been there he'd been the CEO for five or six years. He'd been in the company for 13 years. Like under his watch he had grown EPS from like less than a dollar a share to like I think they did eight you know, over $8 this year.

So, but fantastic results and that's obviously there was a huge COVID bump in the middle of that, but like, you know, they've totally grown through the COVID cohorts and kind of proven to the market that, you know, this is sustainable and like this is like the new level for for their market.

So, you know, so but the the stock, you know, sold out violently um when the CEO left. I think the market was concerned that, you know, he got fired. Um we don't know really what happened because this upcoming school year is going to be a bust.

And that, you know, how could you not think that? Like it's hard to imagine the guy getting fired if he was like killing it.

I I saw this 8K and I was like, "Oh my god." I I think I told you. I mean, they fire him on fire change, whatever it is, July 30th. Whatever it is, July 30th, and then the the new CEO, who is I think 71, steps in steps in and yes, they gave prelim guidance when they hired the new CEO, but, you know, earnings were scheduled for August 4th and I was like, "Oh, I've seen this movie before."

You put in the new CEO, prelim guidance, and then the earnings like 3 days later, 2 days, whatever it is, you come out and you say, "Oh, next year's going to be tough. It's all It's all on the prior guy though, you know, I'm here to clean things up.

Blame the prior prior guy. I was only a little independent board member here."

So, look, so I would point to a few things. So, you know, like there's always there's one thing that, you know, you I like investors that like kind of like distill their thesis.

There's like, "What's the one thing that's really going to move the stock, you know? Like what's that fulcrum question?" So, it's enrollments in the fall. So, again, like their first quarter, the September quarter, they're going to report enrollments.

Usually do it 3 to 4 weeks, you know, let's talk late October. So, that's going to be the print that's going to like send the stock up 20 points or down 20 points. And the question is like, are they going to be able to grow this year? That's really like all that matters.

People this you know, when I invested, that was kind of the thesis here is that this is a secular grower in expanding marketplace, generates a lot of cash flow, and like you know, they're the market leader.

And it seems like the penetration, you know, you're talking you know, I mean some of your viewers might not they do virtual public schools. So like it's really under penetrated only 1 to 2% of students do full-time tuition-free you know, stay-at-home school.

You know, it's only in 30 states. And it just seems like this business could be like much bigger 10 years from now.

And so really the question is like you know, the street is taking down their numbers. I think they have them growing like revenue by like you know, 2 and 1/2% next year and like you know, probably barely growing enrollments.

And so let's just talk about why like you know, questions you're going to take the over or the under on enrollment. So like I'm still very bullish on it. And like I'm just triangulating around a few few data points. And you can tell me you know, what you think.

Number one, I think that the the CEO the whole thing like you know, this is all reading tea leaves. But like the last year in in spite of the fact that he had a good multi-year run, the last year was like kind of a disaster.

They implemented a new LMS learning management system which is like the piece of software that they use for like curriculum and students and parents that brings everyone together.

And they they upgraded to an off-the-shelf provider called Canvas which is like the best LMS in North America. But they told it was a disaster like most ERP launches are. And so they they they missed their guidance last year.

So that was number one. And that was under his watch.

Number two, they lost a school in Texas a 6,000 student school which is like pretty significant on a base of like call it 240,000 students. This is This is Lonsdale Academy and it is the first question on their most recent earnings call for those who are kind of doing that.

Correct. So like and again, I've been following this company for years and that was an underperforming school. Every year, you know, it's like a portfolio they have even though they're only in 30 states, they have close to 100 schools.

Part of the business model is that like every single state has multiple schools precisely for this reason cuz if you lose one school for whatever reason that lose its accreditation, so then you can like you can, you know, re-enroll those those students in another school.

So that happened under James' watch. So there's like two big kind of like checks against him during the year that would have been plausible for the board to say, you know, enough is enough.

Um in spite of the fact that like maybe like things weren't falling off a cliff, but again, we're only going to know when they when they um report.

If I could jump in there, you know, I when I read the Q4 earnings call with the new the it's the new CFO who says it, but he says funding environment looks favorable, application volumes strongest application volumes, maybe slightly behind last year, but still strong, encouraged by conversion rates.

Like it doesn't sound maybe I'm wrong, maybe they're lying to me, maybe they're putting on a brave face, but it doesn't sound like something that's about to go negative or have the rug pulled out from you or anything.

Yeah, I I would agree. There's a There's a lot of breadcrumbs here and like and there's like a whole like just like you have to understand like optically like mathematically like so they basically started the year they're going to the end of the year with less students than they started and that sounds really bad and that was a self-inflicted because they were having issues with with their LMS they intentionally throttled back something that's called in-year enrollment.

So So basically the what that means is that the you know when they when they report next year they're reporting off a lower base than they previously usually they add students in the middle of the year.

So but like that doesn't speak you know what matters is like the underlying dynamics of the market and are they healthy or not healthy and so I feel strongly that you know the market is healthy

just actually sorry to to go back to the LSOA that's the school in Texas that they lost. I'm very very confident that they're going to be able to enroll a large percentage of the students in the other schools that they have in Texas.

That's what happened in New Mexico, right? Correct that yeah that happened the previous year again this happens every year but part of the uncertainty going into the CEO leaving was this was the only school in Texas that had K through two relatively unique that's like a smaller niche within the market and so there was no other K through two school so stride they have a private school that they were going to like give to they were going to basically give those students in those those grades free education they were able to you know get a permission from the the Texas regulator to open up K through two you know in Texas so I just think that speaks to like my you know I think that's more likely than not that they're going to be able to retain those students but again there's there's a lot of smoke here so I totally understand why the market would be skittish in in context.

If I can follow on three different I mean, the first on the CEO change, I mean, I'm sure you did tons of expert calls. I I I'd liked our podcast so much, I did a few expert calls.

And a lot of the expert a lot of the formers I talked to uh were not big fans of the old CEO to put it something. And I know some people who kind of viewed him as a blocking factor.

So, you know, when I saw the when I saw the change, I was like, "Oh, I don't the timing was not great, but I didn't know if it was a as big a negative as people thought." Like, I thought it actually might be positive.

And just related to that, I will note the new CEO's contract. I mean, he's a 70-year-old stepping into a tech business, and his contract is very much like it spends a lot of time on what happens if this business gets sold. So, I thought all of that was very interesting.

impressive guy. If you look at his resume, like he's been on a lot of company boards. It sounds like he understands like, you know, share buyback math. And most importantly, like he did he did work in the education industry like James did not.

And like, I feel like in order to take this business to its next level, like you need someone that has like, you know, credibility

The feedback on the old CEO, the the thing I heard across the board was I I believe he was the CFO before he became CEO, right? It was a CFO running a business where relationships and education mattered.

And I think the the financial results were really impressive, but I think there were a lot of people who worried about the about that combo.

And Learn is not SaaS per se, but it's not immune. And I think, you know, as the SAS apocalypse happened, a lot of the my worries on this and a lot of people I was talking to, their worries were AI, right?

I mentioned this because, you know, now we're in July. I think some of those AI fears have maybe subsided. And I would also mention I saw Alpha School came up time and time again and people were saying, "Look how great the results are."

I think they've had poor results when they've tried to take their private charter school model to public schools. So, I threw a lot out there, but I'd love to just get your update on AI as it relates to Stride.

Yeah, I mean there's there's also like, you know, like this was like it's this is back in July like and Stride came out with like an offering for K-12 for teachers. It wasn't even like a school, just like a way to kind of like help teachers with their curriculum.

Like stock was down like five or 10 points on that. So, like the market is clearly thinking that way. How could it not?

Um but I think that I would just say anyone that's concerned about you know, AI like taking over this business like they haven't done enough work in terms of like how like messy and complicated this is.

Like there's just like this is literally like the soup to nuts the entire you know, they're are basically taking a brick and mortar school and they the only difference is that it's online.

So, that means there's teachers, you know, there's there's actually physical textbooks. They're you know, like they're distributing textbooks and you know, laptops to all the kids.

And then there's you have to be credentialed, right? Like this is taxpayer funded, you know? So, like whenever you're you know, just like go down the list of all the different and there's like tons of different stakeholders.

There's there's there's parents, students, teachers unions, you know, like there's just a lot um going on. So, like, anyone that just comes in and says like, you know, casually like AI is going to blow this up like there's no way.

Like, it more likely is that like, you know, one of the biggest line items, which is is curriculum because like the curriculum has to be like customized based upon the state and even the district.

And then there's like 12 There's 12 different grades. Like, there's not just like one SKU. They're selling like tons of And then one of the biggest things people don't appreciate is like they have you know, if you're going to take taxpayer money, you have to have you have to be willing to you have to be open to everyone.

So, like, students with disabilities and kids that have like individual learning learning plans because they have some type of learning disability. Like, you have to cater to all their needs and provide for them.

So, you know, like just spend a couple hours like, you know, going on the the the chat groups for parents and stuff and like you'll quickly realize that like there's no way that like someone's going to just let, you know, a piece of like AI software come in and like run this thing.

No, and I can't claim to be the world's foremost expert, but this is, you know, in the the few tweets and stuff I saw written, this is what people were saying about Alpha School.

And you know, I maybe I feel silly for being worried, but they're like, yes, Alpha School, when you're when you're only recruiting and you can screen out for gifted students, so all your students are gifted and all of their parents can pay $50,000 a year for private school, it turns out your results are pretty damn good with AI.

But when you're like, you know, and we talked in the first podcast about a lot of these a lot of students with who come to Stride are dealing with much bigger issues, you know, they're they're coming from public schools, they might have trouble backgrounds, they might be moving around a lot.

Like, yeah, the Stride model the Alpha School model might work great for people who have every advantage in the world, but public school needs to serve everyone. And Stride is operating in a very difficult environment and putting out pretty as we discussed, pretty good stats for all that.

Yeah, I just think we know people think about the investment just have to you know abstract and think like they're really being long school choice here. And um you know it's it's we're not getting rid of like compulsory K-12 education.

There's like very substantial economies of scale like when you are able to it's like any technology business you know like there are there's a lot of and that's that's what James was able to do that's why the stock like you know it was like up over 10x like under his watch which is like really impressive because they were able to like invest more than the competition and they're also able to like show like some pretty significant operating leverage.

And you know I think that you know if you look at from on the demand side of it from you know parents and students are just like there's a huge population of people that like they're like not not just they like that like the people that use it like they're desperate for this because like they just don't fit into the regular school system so like when you have that dynamic where like people like you know crave they really want your product and they need your product and they're willing to like go to bat for you especially if there's like you know in the state legislature I think that the political risk is actually been dramatically reduced like post covid like people this used to be like a nice have now it's a must have cuz like what if there's another pandemic.

So like that's kind of like a sea change in and so like I think eventually you know maybe this is going to be a year where who knows what happens you know they were they were conservative on the call why not you know like I would have been conservative coming out of the gate.

Totally. I I mean again this is one of the reason they they didn't give 27 and you worry they get the new guy in and he's just going to come and throw everyone under the bus and say hey we're slashing everything we we've got no visibility but it it I I mean yes you would have liked it if they said revenue's going to be up 30% we're going to enroll double the students and everything's going to the moon but they they were pretty positive on the call things considered.

Worst worst case I was just thinking the um So Canvas is like their LMS and like that was the cause of the big sell-off. The stock was down like 60% on the Canvas implementation.

Turns out like um Canvas is owned by company called Instructure, which is owned by KKR. So, like in the worst worst case, like you know, like this thing is, you know, go they have a, you know, I I reset year.

Like I can't imagine like they they know this asset. They probably could figure out like

That That was my last question, actually. Would you be surprised if this was a public company in 18 to 24 months? I don't know. I'm not I'm not playing, you know, like I I I I I never like try to make that part of I I don't know.

Like I I feel like I don't know how to handicap that, but I think it is interesting that, you know, what you know, they could insource the cost of the LMS, and like they probably see what's going on, like you know it better than anyone else, and see that ultimately, like, you know, if the demand is there, and they continue growing, this is a great business, you know, and it's going to be around for a long time.

I think this is uh I think this is much more likely than your public than your average public company to get taken out, both just the the nature of this business and the recent CEO change.

But, you know, much more likely than your public company, does that mean 5%? 10%? 75%? Uh I take under 75%, but I probably take over that from 5%, but that's a a long long range of