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. Continued...