For

Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

, the number $4.1 billion tells the whole sad tale.

Sloping
Cisco since the bubble burst

The San Jose, Calif., data networking king said Monday it will

write down an astonishing $2.5 billion worth of parts, a sum equal to the inventory the networker was carrying at the end of last year. Worse still, in noting its expected inventory at the end of the current quarter, Cisco served notice that it has been flying through the caution flags, adding $1.6 billion in inventory in just three months.

This parts-buying rampage isn't the work of a company in touch with a

downturn shaking every player in the market. That shows that even as the company takes significant steps toward getting a handle on its current problems, new issues -- including another inventory overhang -- could soon arise. Cisco shares dropped 8% in after-hours trading, hitting $15.75.

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Growing Pains?

"They set out to grow at

a 70% rate this year and it took extraordinary steps to cover that," says

Sanford Bernstein's

Paul Sagawa, who, last fall, was among the first on Wall Street to say equipment makers were blind to the impending spending cuts. "But they put the pedal to the metal just as the market came to a screeching halt."

The biggest skid marks came from the small telcos, whose fortunes came crashing down the hardest when the market stopped funding their cash-intensive network-building dreams.

Using a term he may soon regret, Cisco CEO John Chambers said the economy's nosedive and the equipment-spending slowdown were like a "100-year flood." But some observers were quick to point out that Chambers may be putting the emphasis on the wrong event.

"We didn't have a 100-year flood -- we had the bounty of a 100-year harvest," says Sagawa, who rates Cisco hold and whose firm does no underwriting. "They're acting like the unique phenomenon was this nasty down cycle and capital crisis, when, in fact, it was the recent frothy, consequence-free sales boom."

Notably, 70% of Cisco's inventory writedown was related to the service provider business -- a failure to push gear on the cash-strapped phone and Net access companies Cisco was hoping would open the door to the much larger telecom equipment market. Cisco's core business is routers and switches that manage traffic between computer systems.

One of Cisco's strategies was to use its healthy cash supply from its information-technology sales to

finance the sales of new gear to the start-up telcos. The plan seemed to work initially, but has since

come back to haunt the company a bit as outfits such as

Winstar

(WCII)

,

ICG

and

TheStreet Recommends

Rhythms NetConnections

(RTHM)

ran low on cash or ended up in Chapter 11.

Cisco also faces a market

awash in its own nearly new gear as start-ups fold and assets get auctioned or sold directly to some of Cisco's would-be customers.

Adding to its predicament, Cisco killed its Monterey optical switch earlier this month, ending internal efforts to push out a hot product just when some equipment buyers are looking for devices that help them manage optical traffic.

The Whispers

Chambers hinted that Cisco would look to acquisitions to fuel growth. In some minds, that comment rekindled speculation that Cisco intends to buy an optical gear maker such as

Ciena

(CIEN) - Get Ciena Corporation Report

,

Sycamore

(SCMR)

,

Corvis

(CORV) - Get Correvio Pharma Corp. Report

or closely held

Tellium

.

"Cisco is facing the need to fill a gap in its 'end-to-end' integrated product strategy," says

CIBC World Markets

analyst Steve Kamman. The write-off of Monterey "certainly adds to the likelihood of an acquisition and would probably imply a major buy rather than a start-up," says Kamman, who rates Cisco a hold and whose firm has done no underwriting for Cisco.

The alternative is that Cisco could focus on its strength and push toward more data gear, with new efforts in storage tech and perhaps wireless Internet applications, say analysts.

Small phone companies and Internet service providers may continue to offer some opportunity, but the timing of Cisco's efforts to get into telecom could hardly have been worse. Even the great fortune Cisco had with the Cerent optical box, which became a runaway success as a metro on-ramp type Internet device, won't help the optical business meet its once lofty projections. Cisco now expects Cerent sales to be in the $3 billion range at the end of the year, down from a previous high-end target of $7 billion.

"They thoroughly cracked the emerging carrier market," says Bernstein's Sagawa. "Unfortunately, the emerging carrier market is the one where no one has any cash." The

Baby Bells

are still spending, but they don't typically buy Cisco gear, he points out.

"Cisco is viewed as a data-specific equipment provider, and while they play a role, they aren't yet defining the architecture of next-generation networks," the analyst says.