By Malathi Nayak
SAN FRANCISCO (Reuters) - Activision Blizzard Inc raised its 2012 outlook on expectations that strong sales from recently launched fantasy action game "Diablo III" will offset an exodus of users from its bread-and-butter "World of Warcraft" franchise.
The shares of the world's largest publisher of video games - majority-owned by French media conglomerate Vivendi SA - slid 4 percent after it revealed it lost another million users from its signature online role-playing game.
Investors closely watch subscriber numbers for "World of Warcraft," Activision's most profitable business and the source of a steady stream of subscription-based revenue.
But subscribers for the 7-year-old game have dwindled in recent quarters as users switch to free offerings. Subscribers dropped to 9.1 million in the second quarter from 10.2 million last quarter.
"The sort of dent in the armor is the number of subscribers for "World of Warcraft," a pretty steep sequential decline in subscribers. And that's going to be a red flag for investors," said Colin Sebastian, an analyst at RW Baird.
The title's next expansion pack, "World of Warcraft: Mists of Pandaria," will be released on September 25.
Mike Hickey, an analyst at National Alliance Capital Markets, said the expansion pack could lure retreating "Warcraft" gamers back into the game and generate revenue.
"That's viewed as a catalyst. It brings subscribers back into the game," he said.
DIABLO III RAGES ON
Activision is hoping that "Diablo III" will boost its online business. Launched in May, the game already has more than 10 million players, the company said on Thursday.
The company reported lower earnings and sales in the second quarter that beat Wall Street's expectations. And it raised its 2012 forecasts for both revenue and earnings.
Activision now expects earnings per share of 99 cents in 2012, versus 95 cents previously. It raised its revenue estimate to $4.64 billion from $4.5 billion.
"We raised our guidance for the year based largely on the over-performance of Diablo III," Chief Executive Bobby Kotick said in an interview.
The game sold 3.5 million copies within 24 hours of its release and set a new record for being the fastest-selling PC game and has topped game charts for the last six months.
Vivendi Chairman Jean-Rene Fourtou is testing the appetite of possible buyers for his company's 60 percent stake in Activision Blizzard, sources told Reuters last month.
This came in the in the wake of the departure of Jean-Bernard Levy, CEO of the media and telecommunications company. Levy's exit revived speculation that Vivendi wants to sell its stake, which is valued at $8 billion.
Kotick declined to comment on this.
Heading into the holiday season, the company's 2012 pipeline includes "Call of Duty: Black Ops II," which is scheduled for a November 13 launch.
The company announced in July that it plans to offer its popular "Call of Duty" title as a free-to-play online game in China, in a bid to expand its footprint in Asia. "Call of Duty" represents Activision's largest franchise.
Activision has partnered with Tencent Holdings Ltd an Internet and wireless services provider that will have an exclusive license to operate the shooter game in China.
Revenue fell 6 percent to $1.08 billion from $1.15 billion a year ago. Net income dropped 45 percent to $185 million, or 16 cents per share, from $335 million, or 29 cents per share, in the year-ago period.
Adjusted for the deferral of digital revenue and other items, the company said income rose 90 percent to $224 million, or 20 cents per share. Wall Street analysts were expecting 12 cents per share on average, according to Thomson Reuters I/B/E/S.
The company's stock dropped slightly to $11.50 in after-hours trading from a close of $11.77 on Nasdaq.
(Reporting By Malathi Nayak; editing by Richard Chang and Andre Grenon)