Cisco Systems' stock experienced a significant pre-market plunge, dropping 7.72% in early trading. The sharp decline followed the networking equipment giant's release of its fiscal second-quarter earnings results after the previous trading session closed.

Despite reporting better-than-expected financial performance with adjusted earnings of $1.04 per share beating estimates of $1.02 and revenue of $15.3 billion surpassing expectations, investors reacted negatively to the company's margin outlook. Cisco's quarterly adjusted gross margin of 67.5% came in below analyst estimates of 68.14%, and the company forecast third-quarter margins between 65.5% and 66.5%, significantly below the expected 68.2%.

The tepid margin guidance overshadowed strong AI momentum that included $2.1 billion in AI infrastructure orders from hyperscale customers. Investors expressed concern that rising memory chip prices across the technology industry are squeezing Cisco's profitability, with the company acknowledging it is grappling with climbing memory costs that are impacting gross margins despite robust demand for AI infrastructure products.