Cisco CEO: It's 'garbage' to think Facebook's and VMware's network projects will hurt Cisco

Flying high after reporting a better-than-expected quarter, Cisco's outgoing CEO John Chambers had some strong words for the upstarts hoping to take on his company.

He said it's "garbage" to believe they will cut into the company's 61% profit margins.

Cisco is under attack right now from a new way to build corporate networks known as software-defined networks.

SDN uses special software on cheap commodity hardware to connect computers and data centers, instead of the expensive custom hardware and software that Cisco makes.

Chambers calls them "white box" or "software-only" products.

VMware is the market leader. Even as Cisco was reporting on it quarter, VMware was published a blog post celebrating the progress its made with its Cisco-killer product, NSX, which began selling about 19 months ago.

VMware says it has 400 customers testing NSX, with 70 of them actively using it and more than 50 deploying it in a really big way, spending more than $1 million apiece on it.

Now, $50 million is peanuts compared to Cisco's networking business. Cisco's switches brought in $3.6 billion last quarter alone, up 6% over the year-ago quarter.

But VMware isn't the only threat. There's also a whole crop of startups selling this kind of networking software many of them led by former Cisco engineering stars.

One of them, Cumulus Networks, now has its products being sold by Dell and HP and as part of Facebook's game-changing network switch project.

Another, Pluribus, is backed by Yahoo founder Jerry Yang and having success in China, one of the markets where Cisco is particularly struggling.

Cisco has responded by building its fastest-ever switch, called the Nexus 9000, for which customers can buy optional SDN software. And Cisco says the Nexus 9000 is selling like hotcakes, that it now has over 2,650 customers for it, and 580 bought the SDN software, too.

Still the concern is that Cisco will have to discount its products deeply to compete with the likes of VMware, HP, Dell, Cumulus and Pluribus and others. And that Cisco's famous fat margins will disappear.

Word is that Cisco has grown so worried about these so-called white box competitors that it has quietly built its own line of cheap, commodity "whitebox" switches and signed Facebook as a customer, according to respected network industry analyst, the Rayno Report. (Cisco confirmed to us that Facebook is a customer but didn't detail what products it buys.)

Now Chambers says Cisco's results prove that the company isn't threatened at all.

"When you have switching revenues up 11% last quarter and up 6% this quarter, it's off the charts," he said adding that two years ago everybody was modeling growth at "zero and modeling our margins to go down."

"Our margins on switching have been at the higher end of our range. They've been remarkably consistent for the last eight quarters. So all this garbage about new players coming in, and software coming in, and white label killing our approach was entirely wrong," he said (emphasis ours.)

So all this garbage about new players coming in, and software coming in, and white label killing our approach was entirely wrong,"

He summarized, "We are a cash and profit machine."

But that's a bit of whitewashing on his part, too.

Buyinge new computing infrastructure isn't like buying a new smartphone or watch. Companies don't lightly yank out their existing networks and replace them with the newest tech. An industry transition like this could take a decade, as companies play with the new tech, add it into their networks and use it more over time.

On this same call, Chambers even talked about how it took Cisco itself years to upgrade its own IT infrastructure. Cisco knows this and is moving as fast it can to sell more high-margin IT services besides networking, as well as new areas of networking like the Internet of Things.

Still, the threat to Cisco's margins remains real, if not immediate.