Intelsat's (I) CEO Dave McGlade on Q2 2014 Results - Earnings Call Transcript

| About: Intelsat SA (I)

Intelsat S.A. (NYSE:I)

Q2 2014 Earnings Call

August 4, 2013 11:00 am ET

Executives

Dianne VanBeber - VP, IR & Corporate Communications

David McGlade - Chairman & CEO

Michael McDonnell - EVP & CFO

Analysts

Simon Flannery - Morgan Stanley

Phil Cusick - JPMorgan

Batya Levy - UBS

Joe Mastrogiovanni - Credit Suisse

Bryan Kraft - Evercore

Michael Funk - Merrill Lynch

Andrew Spinola - Wells Fargo

Roshan Ranjit - Nomura

Jason Kim - Goldman Sachs

Mike Pearce - JP Morgan

Anthony Klarman - Deutsche Bank

Operator

Good day, ladies and gentleman, and welcome to the Second Quarter 2014 Intelsat S.A. Earnings Conference Call. My name is Lisa and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Dianne VanBeber, Vice President, Investor Relations, Corporate Communications.

Dianne VanBeber

Welcome, everyone, and thank you for joining Intelsat’s second quarter 2014 earnings conference call. Earlier this morning, we issued our earnings release and published our quarterly commentary, both of which are available at intelsat.com.

The quarterly commentary provides the investment community with the information and context that you need to analyze our results well in advance of our discussion today. We use the quarterly commentary to make your time with us more efficient and to maximize the time on this call for Q&A with management.

During today's call, we will discuss adjusted EBITDA and other financial metrics not prepared in accordance with U.S. Generally Accepted Accounting Principles, including EBITDA-related margins, adjusted net income per diluted common share and free cash flow from operations.

We provide reconciliations of these metrics to the most directly comparable GAAP measures in the earnings release and on our website. Later today, we'll be filing the quarterly report at Intelsat S.A. on Form 6-K with the SEC. You can find the link to the filing on our website.

Additionally, our conversation today will include forward-looking statements reflecting our current expectations for future industry conditions as well as our business strategy, market trends and positioning and expected future financial performance. These forward-looking statements are subject to risks and uncertainties, many of which are outside of our control.

Please refer to the Safe Harbor statement included in our Annual Report on Form 20-F for information regarding some of the factors that could cause our actual results to differ materially from our expectations.

Finally, please be aware that our conference call today is open to the investment community and media, with the media invited to participate in listen-only mode. Members of the media are not authorized to quote, either directly or in substance any participant in the call, who is not a representative of Intelsat.

With that, I'd like to turn the call over to Dave McGlade, our Chairman and CEO; and Executive Vice President and CFO, Michael McDonnell, who are here to offer you additional detail on Intelsat's business and financial performance. Following brief opening remarks by, Dave, they'll be happy to take your questions.

Dave McGlade

Thanks, Dianne. In the second quarter, we were able to demonstrate progress on both our equity thesis and our business strategy. We remain focused on our two phased investment model, the first phase of which is the leverage to create equity value. Solid adjusted EBITDA margin performance, reduced interest expense is compared to 2013 and inline capital expense. We today increased our guidance. We now expect to reduce debt in 2014 by approximately $475 million.

With respect to our business strategy, our focus is on providing infrastructure to the blue chip companies where satellite services are essential to their operations. The fifteen year contract we signed in June with African Direct-to-Home operator MultiChoice is a prime example. Under the agreement, we will provide MultiChoice with expansion capacity for its DTH service and our successful video neighborhood which serves Africa and Asia.

The contract will contribute to our future revenue growth and delve value on our fleet and was structured in a way that it does not impede our debt pay down goals. We also continue to focus on getting new inventory in the service. Intelsat 30 is set for an aerial space launch early in the fourth quarter. We expect to have the satellite in service in the fourth quarter of 2014.

Overall, our business trends are largely unchanged since our last earnings report. At $616 million, our second quarter revenues were inline with our view and continue to be consistent with our expectations for total 2014.

Adjusted EBITDA in the second quarter at $490 million declined on the lower revenue base. However, our adjusted EBITDA margin continues to trend favorably. At 80% of revenue our adjusted EBITDA margin reflects lower cost related primarily to better overall collections experience as well as lower professional fees and strong expense controls.

Given the higher scheduled interest payments in the second quarter and after funding $186 million in capital expenditures, free cash flow used in operations was $56 million. With the return in the third quarter of lower scheduled interest payments, cash flow from operations will again be in strongly positive territories.

Given that business conditions are largely unchanged, we are reaffirming the 2014 revenue guidance we provided in February of $2.45 billion to $2.5 billion. I indicated that our adjusted EBITDA margin experience is trending positively and as a result today we are updating our margin guidance to a range of 78% to 79%.

CapEx guidance for 2014 net of pre-pays remains the same as the update provided in early June of $500 million to $550 million. We look forward to our upcoming satellite launches viewing feature growth. For now, we remain focused on reducing debt as an important near-term leverage to create equity value.

With that we are ready to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Thank you very much. Good morning. I wanted to talk about the increase in the debt pay down to $475 million. Can you just talk through, you didn’t change your prepayment guidance but you suggested that they was an increase in prepayments from MultiChoice this year assuming that this goes through the dollars and cents there and perhaps how you are thinking about applying that $475 million.

And then on IS 30, it will be in service in the fourth quarter, does your guidance include any revenues from that and perhaps you can just help size that for us? Thank you.

Mike McDonnell

Sure, Simon. It’s Mike speaking. And I will address the pre-payment question, I think that you may recall back in June when we announced the MultiChoice transaction. We did update our CapEx and our prepayment guidance at that point in time and we increased our CapEx and prepayments by $50 million. So that was a net zero and so MultiChoice is not part of the reason for the increase from $400 million to $475 million. The reason for the increase in the guidance is really related to the fact that our adjusted EBITDA is coming through pretty well.

We have had very strong margins for the year part of that is due to mix, part of that is due to the fact that our collection experience has been very positive thus far and it’s beginning to feel like the struggles that we had particularly in Africa last year around collections are now seemingly behind us.

So I think at the end of the day, it’s really just a function of the better EBITDA as well as the very good cash management and working capital management that we have been able to have that really drives the reason for the increase in the estimated debt pay down.

Look, we will make that decision to time we have between now and the end of the year, I would say that when you look at the 8.5% notes that we have that mature in 2019 that become callable later this year, obviously that’s a logical candidate but we will make that decision as we get a little deeper into the year.

Simon Flannery - Morgan Stanley

Thank you.

Dave McGlade

On Intelsat 30, Simon, we are indeed looking for revenues to occur late in the year, so when we gave guidance that media would be stable this year, it certainly included those revenues from IS 30 which will occur mid to late fourth quarter.

Simon Flannery - Morgan Stanley

Great. Thank you.

Dave McGlade

Welcome.

Operator

Your next question comes from the line of Phil Cusick with JPMorgan.

Phil Cusick - JPMorgan

Hey, guys. Thanks. I guess on the revenue side, if I just ran this quarter’s revenue out for the next two quarters, we did to the midpoint of revenue guidance, should we expect any sort of sequential flattening or even rebound or should we really be thinking about the lower half of revenue guidance at this point?

Dave McGlade

I think the only catalyst to revenue growth this year will be the launch of IS 30, which I just mentioned.

Phil Cusick - JPMorgan

Yes.

Dave McGlade

We are seeing the effects in government and in network services for the reworks we have done on contracts flowing through the P&L and that will occur over time. But, generally we are still comfortable with the guidance that we have provided to-date.

Phil Cusick - JPMorgan

Okay. And can you talk about update on the government front, what’s going on there with renewals and when can we expect revenue to stabilize there?

Dave McGlade

So we are still in a position where we do not have a great amount of insight to what’s happening, we are still seeing the pressures of sequestration, smaller amount of revenue declines relating to Afghanistan but we are still in a position where we are seeing either the cancellations or the consolidation of capacity and some pricing pressures affecting our business. While I believe a lot of those reworks are now behind us as I just mentioned, they have to flow through the P&L over time. So we continue to see some downward pressure as you have seen in the last several quarters.

Phil Cusick - JPMorgan

Okay. And then last if I can, Dave, I know you have talked to a lot about the government doing more private every time. Can you talk about the opportunity for Intelsat from the posted payroll solutions program for the air force? Thanks.

Dave McGlade

Sure. So HoPS is a Hosted Payload opportunity, it’s called an IDIQ or Indefinite Delivery, Indefinite Quantity. It’s a long-term opportunity, several companies have been chosen to participate in the program we are one of them. And over time, we think that will give us some growth but we have to compete and have the capacity available when it does come to market.

There is also an opportunity with Pathfinder, you might have seen that SES won the first Pathfinder deal. We originally came out with the Pathfinder idea with Space and Missile Center in Los Angeles several years ago and at that time we had capacity but unfortunately we do and it is required to have at least five years of capacity in inclined orbit to satisfy the needs of that customer. So we have to present a suboptimal solution and we didn’t win that deal. However, Pathfinder II will be coming up at certain point and we look to be competitive for that one.

So we are seeing the fruits of our labor in terms of procurement or acquisition reform and as a result, we do feel that there is a changing environment that could benefit us over time as this is really a hybrid approach towards the needs of the Department of Defense and other departments within the U.S. government for capacity on the commercial side married up with military owned capacity.

Phil Cusick - JPMorgan

Thanks Dave.

Dave McGlade

You are welcome.

Operator

Your next question comes from the line of Batya Levy with UBS.

Batya Levy - UBS

Okay. Thank you. On the media side, you mentioned that there were some non-renewals in North America, can you quantify the impact you saw in the quarter and where you think about this has went to. And should we expect more pressure coming in from that in the second half?

And sort of a more bigger picture, you put out your expectations for 4.7% compounded annual growth rate in transponders over 5-year period. How do you think that will translate into sort of a similar revenue growth number given what you are seeing in terms of customer demand and expectations for pricing? Thank you.

Dave McGlade

So we have three unrelated pressure points for our media business in the quarter and two of them are related to U.S. customers. One from a downlink perspective, so this is a small customer that over time has been declining, so this was anticipated and I think is not necessarily representative of any broader trends. The other is with a specific deal that we had done several years ago that just took effect in the quarter. So frankly the changes in the U.S. are what we have anticipated for some time, we are seeing maturation in the market, our major immediate customers are growing outside of the U.S. and now that’s really been their focus. And there are some pressures that we have seen because of compression technologies going from standard def to high def. But these are minor in the quarter and certainly something that again we anticipated.

So the growth for media really is around new capacity coming on line first IS 30 in the fourth quarter then IS 31 which is the backup satellite for DirecTV. We are very pleased with the progress of IS 34 that’s largely sold out at this point. And then of course, we have now done a deal with MultiChoice for IS 36. So we feel good about our media business and the U.S. media companies are a big part of our future as they look to grow outside the U.S. and we see that as the opportunity whereas in the U.S., it’s a mature market. Although from a pricing perspective this has held up pretty well.

On the growth long-term – growth, Mike you want to take that?

Mike McDonnell

So couple of comments on that, it’s a little tricky to answer because we don’t provide guidance beyond 2014, but I would say a couple of things. One is that I think when you look at the transponder account growth as you know, the Epic leads what’s going to add a lot of capacity into that metric. And so that doesn’t begin until really in service like the 2016. So it’s a little bit in terms of that 4.7% CAGR. I would describe that as a little bit more backend loaded in terms of that metric and I would say that in terms of how much that translates into an actual revenue growth statistic remains to be seen. But as we have said publicly, it’s a two step investment thesis and 2014 and 2015 are much more about organic free cash or retiring debt in front of equity followed by enhanced growth as we get into 2016 and beyond as Epic comes into play.

Batya Levy - UBS

Okay. Thank you.

Dave McGlade

Thank you.

Mike McDonnell

Thank you.

Operator

Your next question comes from the line of Joe Mastrogiovanni with Credit Suisse.

Joe Mastrogiovanni - Credit Suisse

Hi. Guys, thanks for taking the question. You continue to see pressure in Africa, it seems like due to oversupply but in the commentary you did note that conditions have improved. Can you just talk a little bit about what’s change and do you expect any of this to have an impact on the future trends?

Dave McGlade

Sure. Maybe I could start at a macro level and then hand over to Mike, who will talk about the bad debt.

We have seen customers that are willing to work with us to restructure their deals. The pressures have been mostly around yield, so it’s pricing the declines that are affecting us. As we said in the past, the volume has held up pretty well. And we have most of those renegotiations behind us. Again, they have to flow through the P&L just like our government reworks have to. But, they are ones that were satisfied that we have solutions that help us bridge to Epic longer term.

We are concentrating on the best customers in Africa, so we said before working with the blue chip customers, working with those who have the wherewithal and the need for a significant satellite capacity over time. We think we are advantaged in the long-term because of the efficiencies of Epic. So we are really transitioning with these customers. Yes, they are getting price concessions, but over time we will have – we believe the best capacity – but the best economics that we can help share with our customers in the longer term.

And we have seen a stabilization of the bad debt, Mike if you want to take him through it.

Mike McDonnell

Yes. I think what I would just add to that as it relates to the collections experience. We felt like obviously, the situation that emerged in Africa was somewhat set in and we were able to work through. We feel like pretty quickly and part of the reason for that was that we were talking about a limited number of names, the number of customers that we have to work through pricing and management adjustments was fairly limited. We were able to do that reasonably efficiently and reset terms. And as a result of that the volume is actually held that pretty well, but because we have to reprice things at a lower level obviously, those pricing adjustments and that yield is now coming through and impacting the revenue. But, I would say overall, the majority of the customers that we have to work with are now rehabilitated on the collection side and then as you have seen from the bad debt expense year-to-date the collections experience has been pretty positive in all regions including Africa so far this year.

Joe Mastrogiovanni - Credit Suisse

Okay. And then on the improved collections, is it that customers are doing better until we would expect this to continue, have the practices changed at all, was there any one-off events that we’re actually seeing help improve the collections?

Mike McDonnell

I would say its both. I would say the customers are doing better overall because they have got better pricing. So I would really say its both, I think that the one thing that I would point to is that in our results for this year, we do have a number of accounts where we’ve collected monies that were reserved last year. And so what you had is a situation where the bad debt expense has come through in the form of credit both in the first quarter and the second quarter and that was not necessarily a run rate concept that we would expect for ever. But in some cases we did reserve accounts that we estimated made the uncollectible and we are actually able to get the money in 2014.

Joe Mastrogiovanni - Credit Suisse

Okay. Thank you.

Dave McGlade

You are welcome.

Operator

And the next question comes from the line of Bryan Kraft with Evercore. Please proceed.

Bryan Kraft - Evercore

Hi. Thanks. You said a follow-up question in the media business, how well do you think you are positioned to capture that growth you talked about from U.S. customers overseas versus your competitors. And how would you characterize the growth opportunity within these customers by the major regions, is it more of a Europe, South America, is there anything from those customers sets in Africa and Asia, if could just talk a little bit about that would be helpful? Thanks.

Dave McGlade

Sure. So when we look at the media customers in the U.S. purchasing outside the U.S., this is a trend that has been extremely positive in Asia Pacific and that has provided growth for us over the last few years in Asia Pacific from a downlink perspective. We also see that in Latin America and I think a great example of that is the deal we did with HPO and their expansion on IS 34. So we have seen those two regions be the primary beneficiaries. But, I believe over time as we see the development of Africa as the GDP continues to rise as it becomes more of an important market to our customers that will see some growth there. But, today that’s been minimal.

There has been some growth in places like Russia with some of the U.S. programmers. But that certainly is where we also see some opportunity in the future as well. So I would say primarily Latin America and then Asia Pacific but there are other regions where over time we are going to see further growth.

Bryan Kraft - Evercore

In Europe, are your competitors capturing most of that business because it seems like more recently and I would think even to an extent currently there is a lot growth in terms of that ramping up HD channels in Europe, is that just – your competitors happen to be getting that share of the business?

Dave McGlade

Yes. So we have virtually no position in Western Europe and we have seen as well especially SES benefit from the growth of HD and additional channels in that region we have no capacity there. So we are seeing some growth though in Central and Eastern Europe and Russia. And we have done with a DTH platform in Russia that has provided growth over the last year or so. And we have also seen it with a recent deal we did for DTH in Central Europe.

So we are competitive in Central Europe, Eastern Europe and Russia, we do not have a very media business in Middle East and then we have a strong media business in terms of development and MultiChoice is a great example of that in Sub-Saharan Africa.

Bryan Kraft - Evercore

Okay. Got it. Thank you.

Dave McGlade

Thank you.

Operator

Your next question comes from the line of Michael Funk [Merrill Lynch]. Please proceed.

Michael Funk - Merrill Lynch

Hey, thank you for taking the question. I have a few. First back in Africa, maybe you can just comment on how much of the at-risk revenues been repriced and then maybe the yield differentials than Europe that you have seen in the repriced versus some of the older contracts. Second, on the planned satellites you have maybe some commentary about the transponders that are under contract and you mentioned you have seen very good demand for some of those satellites where you can help put that to think about the revenue growth. And then finally on government, I know you said that there is still some preliminary visibility but does appear, if you are tracking towards the better end of the guidance for the year meaning close the 15% down year-over-year for government revenue. If that’s not right maybe you can help me think about a kind of step down you expect in the second half of the year?

Dave McGlade

Okay. So in terms of Africa, we have done a substantial amount of work with our customers. So the at risk revenues has diminished considerably not just from a bad debt situation but also in terms of those reworks so well over half of those are behind us. And the yield differentials affect us on the network services side, so not media we are getting good rates – with our media customers. But the differential is fairly substantial from where it has been. So 25% to 30% in some cases, in terms of price reductions from where we had been. I know that is a big number but realize that once we have Epic, we will transition these customers over and we are going to accommodate that because of the additional volume and efficiency we have within satellites.

In terms of transponders, under contract we haven’t – this is due to the Epic piece, we did the big anchor tenant deals on IS 29, we are continuing to try to work more of those but I would tell you that as we get closer to launch, a lot of the customers will then look at transitioning from standard capacity over to Epic capacity. So that will not show up in backlog today that really would be a phenomenon that gets closer to the in service date for those new Epic satellites.

In terms of government, I think we are still comfortable with the 15% to 20% reduction year-to-date we are closer to the 15% as you can see certainly in the last quarter being down 15%. But at this point, we are not ready to say that will be any less than the 15% to 20% overall decline for our government business in 2014.

Michael Funk - Merrill Lynch

Great. Thank you very much.

Dave McGlade

You are welcome.

Operator

Your next question comes from the line of Andrew Spinola with Wells Fargo. Please proceed.

Andrew Spinola - Wells Fargo

Thank you. The next services business if we look at it on a longer time horizon, considering it’s been under pressure near term because of one specific region. But when you look at all the different end markets that you have there whether its cellular backhaul or mobility, is this a business that if you can execute on the opportunity can grow over time or do you think that in the aggregate it’s a flat business or declining business, how do you see the addressable market sort of adding up on a net basis for network services over time. Thank you.

Dave McGlade

I think in the long-term network service is a growth business. If you look at the demand for brand band, the growth of cellular networks in the developing world. And the overall, just a pent-up desire by many people to have data rich devices which they don’t have today and are not affordable today, I’m talking about smartphones and tablets, but mostly smartphones.

We certainly see an opportunity longer term to address that market and this is the underserved than unserved populations of the world. These are villages in India, the small villages in Africa et cetera. And going beyond the universal service applications that we have seen the cellular operators today and really going after it aggressively with better economics that it provides and continuing to enhance that. We think that will grow. So it’s everything from cellular backhaul, broadband networks and then of course mobility. And mobility takes several forms land, sea and air.

So overall, I’m very bullish long-term on network services. The pressures had been significant in the short-term one because of the proliferation of fiber in Africa for example and all of the new operators putting capacity in Africa and the incumbents also expanding the capacity and frankly a lack of price discipline. So over time, because of that that we can very effective and helping grow those end markets because of the economics we can pass along to our customers that we haven’t been able to do historically.

So short to mid-term, we certainly see the pressures, long-term we see opportunity, I think our position is validated by what we see and hear out of Google and Facebook wanting to find ways to bring their services to the developing world and satellites seen as the way to do it.

So if you look at our growth today, we wish we had more capacity for mobility services and other broadband services we just don’t have it. And the real ability to grow will occur with Epic first IS 29 and 33 and that’s of course the next phase of our investment thesis.

Andrew Spinola - Wells Fargo

That’s very helpful. Thank you very much.

Dave McGlade

You are welcome.

Operator

Your next question comes from the line of Roshan Ranjit with Nomura. Please proceed.

Roshan Ranjit - Nomura

Yes. Hi, there. Just a quick follow-up on the government side. In terms of the renewals, are you now seeing that you’re able to renew contracts on the longer term basis whereas before they were maybe done on a three to six month basis, you are seeing a bit more longevity, clearly the offsets of that is regarding price. So if you can provide a bit of color on those dynamics that would be great. Thank you.

Dave McGlade

Sure. So you are exactly right that the normal one year renewals were cut to three to six months. We are seeing some migration back to one year renewals, so it’s a positive sign but it’s still early days for that. And there are pricing pressures and that they continue. And it’s variable based on how hungry the competition is to win business. And when there is a pipeline that is smaller than what it has been, it makes it a more competitive environment for that business. So that’s why we are seeing some pricing pressure with it.

But we are cautiously optimistic that this could improve over time and certainly those longer term procurements are having an effect on the thinking at the Department of Defense.

Roshan Ranjit - Nomura

Great. Thank you very useful.

Dave McGlade

You are welcome.

Operator

Your next question comes from the line of Jason Kim with Goldman Sachs. Please proceed.

Jason Kim - Goldman Sachs

Hi. Good morning. Thank you. The question is about your margin guidance. Is there anything we should think about your margin trajectory for the second half of the year? I knew that should be notably different than the first half you had about 80% margins in the first two quarters of the year.

And then there were some one-time stuff that benefited margins in the first quarter, but 2Q seems like a pretty clean quarter. So just looking at your full year target, it implies that second half margins would be maybe like 78% range and you would still be in hitting the upper end of your guidance range. So just wondering if there is anything we should think about the trajectory of the margins as we go forward in the second half of the year.

Mike McDonnell

Hey, Jason. It's Mike. I think your observation is fair. Obviously, the guidance year-to-date has well outperformed the original guidance we gave. We came into 80% all quarters on original guidance of 78%. I think that as I mentioned earlier, the majority of the outperformance on the margin is really more related to mix than anything else, but I would point out that on the bad debt expense, we did have a small credit for the quarter and at something that you wouldn't expect to sustain. So it's about $25 million of margin or cost on an annual basis that drives 1% of margin. So we're talking about pretty big dollars here that drive a point one way of the other. So we're trying to stay rational.

And I would say that as we sit here today, just given a mix that clearly the trajectory is something better than what we had historically, which has been 77%, 78%. And that was really the rationale behind increasing the margin guidance slightly.

And hopefully, there is more upside to it than downside, but we'll just have to see as the year progresses how well that we can ultimately land, and I would expect that bad debt would comeback. It's something that will not be in the form of credit over time. So at the end of today, the trajectory is solid. A bit better than what we've seen historically, but the bad debt has been a little bit of an upside and a little bit of an anomaly this year so far.

Dave McGlade

And I would just add that the other big driver of OpEx of course is cost of sales and that’s variable based on how much third-party business our government unit has.

Jason Kim - Goldman Sachs

Understood. And just a clarification question about your debt repayment expectations that going up $75 million to $475 million. And just wanted to make sure that is not cash flow driven and does not include any additional usage of cash on hand and/or revolver draws. And when I look at the 8.5% senior notes that they become callable in November of this year that bond is a $500 million issue. So any thoughts in terms of maybe just using a bit of your revolver capacity to call the entire bond as opposed to potentially leaving a very small piece outstanding?

Mike McDonnell

Yes. So we'll decide that at that time, but the way we think about the $475 million that is on a net basis, so that is net pay down. That is not paying down $475 million and having a piece of that -- a piece of revolver outstanding. So that would be net of any revolver draws. And we do use the revolver from time-to-time to smooth our working capital management and that sort of thing. And so your thesis on the possibility of calling the whole thing and using the revolver for a portion temporarily that’s certainly a possibility.

Jason Kim - Goldman Sachs

Understood. Thank you.

Mike McDonnell

Thank you.

Operator

Your next question comes from the line of Mike Pearce of JPMorgan. Please proceed.

Mike Pearce - JPMorgan

Hi. Thanks. Couple of follow-ups from our earlier question I guess, and sorry to go back to Africa a little bit. Can you remind us what period did you really begin to rework the bulk of those contracts? I'm just thinking about when the year-over-year comps get a little bit better there. And then on the contracts in your African business that wasn't reworked I guess, why is that? Why have they not come to you for lower prices as well and all those longer-term contracts? Were that’s more difficult to rework or can you add some color there?

Dave McGlade

Yes. Sure. So there have been pressures in Africa for some time, but when we really saw the bad debt start to tick up and the difficulties mount, was Q2, Q3 of last year. So we have worked over time with these customers. Great deal work in the fourth quarter, first quarter and even into the second quarter. So we're still working with our customers to redo deals and reprice those deals. That’s why I said it had to take time to flow through the P&L all the different deals we have done. Go ahead, Mike, if you want to.

Mike McDonnell

I was just going to add to that. Just to frame it, I think it's important to have a little bit of quantification that the media business in Africa has been very solid and sound. And it's about 5% of our overall revenue base and in network services in Africa it's about 12%. So just to put a little bit of a framing around what we have there, again it's about 12% network services of the overall revenue base and media in Africa is about 5%.

Dave McGlade

And we have not seen the pressures within the media business as we said.

Mike Pearce - JP Morgan

Understood. And then, getting back to the government business. I guess to-date we are seeing more pressure from your off-network government business. And in this particular quarter looks like we are seeing more pressure on the on-network and understand your visibility remains low here overall. But, can you talk about what happened specifically in the second quarter with on-net and then, how you see that mix over the next couple of quarters?

Mike McDonnell

Yes. I think your observation is fair. Certainly, in 2013 the declines were very heavily disproportionate. In the off-net we have seen more of the declines now coming. In on net, I think as we look forward that's probably part of the reason why we are being a little bit cautious on the guidance update for the EBITDA margin because obviously declines in off-network for government have less impact or actually more favorable impact on adjusted EBITDA margin than the off-net, which would put downward pressure on the margin.

So we obviously, as we said earlier this year seeing a little bit more pressure on the on-net than we saw last year and in terms of those trends and how they continue. As we said before, it's -- we just don't have great visibility and the government business is not like another customer sets so we are trying to just keep a close eye on things and be rational there.

Dave McGlade

And I will just add that it moves around a little bit quarter-by-quarter. So this quarter is less favorable in terms of on-net than it was last quarter. But overall, we still see approximately 60% on-net, 40% off-net for our government business with all the puts and takes going on.

Mike Pearce - JP Morgan

Great. And then, Mike, just a quick one. I guess you -- there was a mention of $3 million decline in cost related to joint ventures. Sorry, if this is already flagged historically. But I haven't seen it, I don't think. Can you just add some color what that was and is that recurring cost decline?

Mike McDonnell

Yes. So that's something where we had a charge that was recorded last year on the second quarter related to a joint venture that we’re involved with on a specific satellite and we did not have a similar charge in the second quarter of this year. And I think that that's much more one off last year. I think this year the -- it's much more indicative of what you would expect run rate was.

Mike Pearce - JP Morgan

Understood. Thank you.

Dave McGlade

Thank you.

Mike McDonnell

Thanks Mike.

Operator

(Operator instructions) Your next question comes from the line of Anthony Klarman with Deutsche Bank. Please proceed.

Anthony Klarman - Deutsche Bank

Thanks. Clarifying question first. On the margin or I guess on the earlier question regarding the debt prepayment, you indicated it was due to margin and not the timing of prepayments that were being made. But the margin increase is only about a third of the increase in the debt pay down what you raised at 475. Is the rest of that being generated just working capital? Or CapEx has a $75 million, is that -- do you think you'll be sort of more towards the middle range of that? What else is contributing to that increase to the 475?

Mike McDonnell

Anthony, I think you have it right. It's really on the mix. It's largely working capital management. Obviously, the better collections help not only the bad debt expense in the EBITDA margin but it certainly helps working capital and helps with cash. So it's really that, it's timing of the CapEx. And then, obviously it's a function of how much cash you want to run with on-hand. We have $248 million of cash on-hand at the end of the last year. We have $370 million at the end of the second quarter. And certainly, we don't need to run with cash levels better that high. So it's really on the mix. But I think your observation is fair that I'd point a little more toward the working capital management and timing and a little bit less for the EBITDA margin, although the latter is not inconsequential.

Anthony Klarman - Deutsche Bank

Thanks. And that gets me to the second question. You have cash of $370 million. So to get to the $475 million net you are obviously implying that you are going to generate significant unlevered or levered free cash flow for the rest of the year to get you to $475 million of net pay down. But that obviously will draw the cash balance down quite a bit. What do you think the right run rate is as you exit 2014 and into 2015 given that 2015 the CapEx jumps up again to the 775 to 850, what is the right comfort level for you on cash balance exiting 2014?

Mike McDonnell

Yes. I think we said for a while and I don't really see it changing much. I think plus or minus somewhere around a $100 million on hand is adequate. And we have got a $500 million revolver that is currently completely untapped to mange any ebbs and flows. So I think around a $100 million give or take is probably plenty of cash.

Anthony Klarman - Deutsche Bank

Great. And then, final question is you have mentioned a few times obviously the multiple phases of the priorities and obviously the focus now is on deleveraging the create equity value. How sustaining is the deleveraging that you are doing this year obviously with the absolute debt reduction as opposed to just deleveraging through EBITDA growth, CapEx does jump next year, but obviously you have got the DirecTV contract that comes online, is this something that you think is sustainable in 2015, or is it largely going to be depending up on sort of how things like Africa and stability in the government services works out before you can sort of determine that?

Mike McDonnell

I think it's both but the biggest driver is really the timing of CapEx and so at the end of the day in years we have lighter CapEx, we are going to delever more and in the years that you have your CapEx that you are going to delever less. So I think that's really the biggest driver at the end of the day obviously, EBITDA growth is important as well.

Anthony Klarman - Deutsche Bank

Thanks. And I will throw one more and I forgot this one. Are there other interest savings that you believe you can extract in the capital structure when you look at it you got a relatively low mix of secured debt relative to total debt. And obviously, the bank market is pricing debt a bit inside of the bond market and how do you sort of imagine that evolving over time as you look at refinancing potentially some of your unsecured debt down the road?

Mike McDonnell

I think we have gotten a lot of it. I think we have gotten a lot of the interest savings. We are going to get obviously we are always looking to -- creative way to do more, we certainly when we do re-financings we are able to generate positive MPVs we like and negative MPV we don't like him as much.

I think as it relates to secured debt certainly I would acknowledge that we are well below our covenant limitations there are some rating implications there that we have to be conscious of and think through. But, I think at the end of the day, the majority of the interest savings that I would see for the near term time horizon really come with taking our quantum of debt as opposed to taking down rates.

Anthony Klarman - Deutsche Bank

Great. Thank you very much.

Mike McDonnell

Thanks Anthony.

Operator

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Dave McGlade for closing remarks.

Dave McGlade

Thanks Lisa. Our goals for this year are quite clear. Continue our progress on our planned satellites and maintain our focus on delevering to create equity value. So thank you very much for joining us today. The team will be attending a number of conferences as we move into the fall and we look forward to seeing you then. Good bye.

Operator

Ladies and gentlemen, that concludes today' conference. Thank you for your participation, you may now disconnect. Have a good day.

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