Cisco's shares fell as much as 10.3 per cent to $19.77 in after hours trading on the Nasdaq Stock Market.
The company's gross margin, which is the percentage of profit left after subtracting the production costs, fell to 62.4 per cent in the period ending 29 January.
Analysts blame the lower gross margins on the 19 per cent rise in development costs and 15 per cent increase in sales and marketing expenses.
Mark Sue, an analyst at RBC Capital Markets, said in a statement to Bloomberg: "The product gross margins declined quite meaningfully. We know demand is improving, but will Cisco capitalise on that? And will it have to resort to price cuts to get its fair share?"
The company also reported $1.5 billion, or 27 cents per share, in earnings for the second quarter ending 29 January, while the revenue rose 6 per cent to $10.4 billion.
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