Chegg Settles Investor Fraud Lawsuit for $55 Million

Plus, more on Chegg's (lack of) earnings. Plus, a warning about Snapchat. Plus, a reader poll.

Issue 324

Subscribe below to join 4,196 other smart people who get “The Cheat Sheet.” New Issues every Tuesday and Thursday.

If you enjoy “The Cheat Sheet,” please consider joining the 16 amazing people who are chipping in a few bucks via Patreon. Or joining the 42 outstanding citizens who are now paid subscribers. Paid subscriptions start at $8 a month. Thank you!

---

Chegg Settles Investor Fraud Lawsuit

Buried in Chegg’s most recent earnings report was notice that the company had settled a class action lawsuit accusing it of misleading investors — denying that the company’s revenue was significantly based on academic cheating, when executives knew it was (see Issue 163).

I did not see the development and I thank a Friend of the Sheet for flagging it.

The notice was:

we reached a settlement agreement to resolve the Leventhal class action securities lawsuit. We recorded $55 million for the estimated contingent liability for the loss, along with a $55 million receivable for the insurance proceeds we expect to receive. These amounts had no impact on our Q3 adjusted EBITDA. While we strongly disagree with the premise of the case and deny all allegations of wrongdoing, the decision to settle the lawsuit was driven by the cost and burden of ongoing protracted class action litigation and the monetary costs of defending the case. We are happy to have this matter resolved.

So, $55 million, paid by Chegg’s insurance carrier.

At first, I thought that number was shockingly low, given that the stock has gone from $113 to less than the cost of one-way ride on the New York Subway. But I have no idea. Maybe it will be harder for the company or its (former) executives to get insurance from now on. After all, the primary accusation in the case is misleading the public, which a judge found likely to have happened (see Issue 280). No idea. Not my area.

In any case, this case is over.

Digging in A Smidge on Chegg’s Earnings

In the last Issue, we shared news about Chegg’s layoffs and losses. But, as the note above may make clear, I did not look at the earnings report directly, only coverage related to it.

Now that I have, there are few little morsels worth passing along.

• In the third quarter of 2024, Chegg’s revenue was down 13% year over year

• Subscribers were 3.8 million, down 13% year over year

• Net revenues were $136.6 million — for the quarter

• The company estimates that fourth quarter revenue will be $141 to $143 million — an increase, in other words

Gee, I wonder what would cause Chegg to think their revenue would grow in the final exam — I mean fourth quarter — of the year.

This was also in the report:

across our industry, there has been a continued increase in the adoption of free and paid generative AI products. It has been widely reported and substantiated in industry research, that students are increasingly turning to generative AI for academic support, such as homework and exams. This issue impacts the education ecosystem at large, including universities and education technology companies broadly where students see generative AI products like Chat GPT as strong alternatives to vertically specialized solutions for education, such as Chegg.

Generative AI is eating Chegg’s lunch. Dinner too. But what I’m highlighting here is how Chegg, which is totally not a cheating provider, says students are “turning to generative AI” for support “such as homework and exams.” And that students see “generative AI products” as “strong alternatives” to other “solutions for education, such as Chegg.”

Yes, Chegg was, and still is, in the “solutions for education” business, by which they mean “homework and exams.”

Anyway, after all that, Chegg says:

we do not expect to meet our 2025 goals of 30% adjusted EBITDA margin and $100 million in free cash flow.

I would not think so.

But this bit blew my mind, and I may need some help:

And finally, we launched four direct-to-institution partnerships, providing access to Chegg Study paid for by the institutional partner. These pilots allow us to gather valuable insights on how Chegg can enhance classroom learning, supporting our goal to diversify our customer acquisition and revenue streams, while strengthening Chegg's role in improving student learning outcomes.

If I am reading that right, four schools have decided to pay Chegg to give their students answers to assignment and test questions. I mean, I assume they are schools. Not sure what else “institution” could mean in that context.

And I do get it. Now that students are getting smart and not paying for answers they can get from ChatGPT for free, Chegg has to find new suckers. Purdue University aside (see Issue 16), I cannot comprehend why any school or education provider would pay Chegg for anything whatsoever. It’s like hospitals paying Purdue Pharma to pass out OxyContin in the hallways.

Here’s where I need your help.

I’d really, really like to know which four institutions are in this Chegg pilot partnership. Chegg did not list them. I can guess why. Nonetheless, if you know an institution that partnered with Chegg, please let me know. Reply e-mails to The Cheat Sheet reach me. Or you may e-mail directly to Derek@NovemberGroup.net; you can be anonymous.

Webinar Opportunity with Cursive, Monday, December 9

Cursive, an intriguing integrity platform and Friend of the Sheet, has set a webinar for Monday, December 9 at 4:00pm EST.

Here is the info:

Cursive Technology's plugin for Moodle was released at Moodle.org in November (and will launch with Open LMS Jan 1). Joseph Thibault is hosting a webinar to give an overview of the Cursive integrity/writing tool and the simple (but new) metrics that it brings to the table (plus a sneak preview of their free browser extension for students).

If you or faculty are looking for new approaches to support writing integrity, please join him for a quick overview to learn more: https://cursivetechnologyinc-901.my.webex.com/weblink/register/r1e37546feb6b62f6ac687e342878957a

If you are connected with assigning or grading written work in some way, probably worth checking out.

Also, if you have news and events in the integrity space to share, please send them along.

A Warning About Snapchat

Snapchat is a widely popular messaging application, with a user base that skews quite young — middle and high school primarily.

Recently, an English teacher in Ireland wrote a letter to the editor at the Irish Examiner warning about students using Snapchat’s AI feature, MyAI, for academic misconduct:

As an educator, I’ve observed students increasingly relying on MyAI for homework help and essay writing. The absence of comprehensive nationwide AI training has left many teachers unaware of this trend. 

Moreover, most parents likely don’t realise that MyAI’s responses are seamlessly woven into their children’s regular social media usage, making detection nearly impossible.

Great, right?

Free generative AI is everywhere, and students are going to use it to take shortcuts — faking the work, skipping the learning, taking the credit. Now, it seems, maybe in Snapchat too.

Tell Us What You Like or Value about “The Cheat Sheet”

The Cheat Sheet has about 4,200 subscribers now and I am curious as to why. Would you do me the favor of responding to these two survey questions?

And/or dropping me a note to tell me what you like (or really hate) about The Cheat Sheet? Just hit reply to send a note.

Warning — this is the first poll we have tried and there’s some indication it may not work. If that’s the case, I am sorry. In advance, thank you.

What is it you like most “The Cheat Sheet”?

What about “The Cheat Sheet” provides the most value to you?

Thank you for reading, sharing, and your commitment.