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Red Hat shares dive on news of CFO departure

In a surprise move, the company hires Red Hat's Hal Covert to become chief financial officer, just four months after he started his last job.

Shares in Linux leader Red Hat dropped more than 12 percent today, after chief financial officer Hal Covert announced he was leaving for the same position at struggling hardware maker SGI, after just four months with Red Hat.

Covert joined Red Hat in March after stepping down as CFO of graphics software powerhouse Adobe Systems.

Covert was seeking a new challenge, said Red Hat spokeswoman Melissa London. "The prospect of heading back to (Silicon) Valley and turning SGI around is really appealing to him," she said.

Red Hat shares dropped $2.88 to close at $20.88, after dipping as low as $20.13 in early trading.

W.R. Hambrecht analyst Prakesh Patel downgraded Red Hat from "buy" to "market neutral," adding that Covert is "an experienced manager, and we feel that his focused ability in operations and cost reduction will be difficult to replace."

Merrill Lynch analyst William Crawford also issued a caution. "The loss of a key executive will probably result in weakness for the stock in the near term," he said in a report. "We believe the company remains on track for the quarter, but urge some caution until the company reports results."

Crawford said Covert was lured to SGI by "a handsome pay package and a steep turnaround challenge." He likely will be replaced temporarily by previous Red Hat CFO Manoj George, Crawford added.

Red Hat is the highest-profile business based on the Linux operating system, which SGI has moved to embrace as well. Neither company, however, is financially flush. Red Hat expects profitability midway through next year, while SGI is in the middle of a years-long recovery effort to restore its former status as one of the world's cutting-edge hardware designers.

SGI hasn't been lucky with CFOs of late. Steve Gomo left and was replaced by Betsy Rafael in January, but she left in May.

The news comes amid hard times for the struggling computer maker. SGI today reported a net loss of $608 million for the quarter, or $3.27 per share, including several one-time charges. Revenue was $534 million, a 36 percent decrease from the $828 million for the same quarter the year before.

Analysts had predicted a loss of 19 cents a share, excluding the special charges, according to First Call/Thomson Financial. SGI warned of lowered expectations July 11, when analysts predicted a loss of 8 cents per share.

Though times are hard, SGI has some major new products in the pipeline that could help it recover. Chief among them is a new Origin 3000 server, code-named "SN-1," and new high-end Intel workstations SGI acquired from Intergraph. SGI orders increased 31 percent from the most recent quarter, and the company has a $298 million backlog, more than $100 million of which is for its next-generation server, the company said.

In a statement, Red Hat chief executive Matthew Szulik said he wished Covert well. London said an interim CFO will be named, and then a search for a permanent replacement will be launched.

Covert's departure was unexpected, Szulik said. "I think that it was a surprise," she said.

SGI chief executive Bob Bishop said Covert will help SGI toward recovery. "We are in the midst of a major turnaround at this time, and Hal's profile fits precisely our need to focus on growth and shareholder value," Bishop said in a statement.

As part of its recovery plan, SGI last week acquired the Intel workstation line of former competitor Intergraph. As part of the deal, Intergraph will buy $100 million in SGI products and services over three years, the companies said.

"We've been actively seeking a strategic partner for our hardware business, and SGI is a natural fit for us," Intergraph CEO Jim Taylor said in a statement.

Added Jan Silverman, vice president of advanced systems marketing at SGI: "I think it's quite a coup, quite frankly. It's just what the company needed."