Investors are closely watching subscriber numbers for "World of Warcraft" because the franchise is the company's most profitable business and generates a steady stream of monthly revenue from its millions of users.

The company ended the quarter with 10.2 million "World of Warcraft" subscribers, which is down from 10.3 million from the previous quarter.7

The net loss of 100,000 subscribers is smaller than the 700,000 subscribers it lost during the third quarter.

The industry is struggling to pull out of a protracted slump. Video game sales were down 34 percent year over year in January, according to data released by industry research house NPD on Thursday.

Chief Executive Bobby Kotick told Reuters in an interview that Wall Street has over-reacted to declines in that business. He said the content update of the game in late November helped keep players on board.

"When we introduced the content patch we thought the numbers would stabilize and they have," he said in an interview.

But executives on the conference call with analysts failed to address the threat of Electronic Arts Inc's new video game, "Star Wars: The Old Republic," which is facing off directly against the "World of Warcraft" the online subscription game category.

Analysts are convinced that EA's game, which has attracted 1.7 million subscribers so far, is chipping away at Activision's user base for "Warcraft."

"Clearly it'll have an impact on Activision and they didn't address that. It's hard to believe that EA found an entirely new audience of players for its game that is not from 'Warcraft' players," said Mike Hickey, an analyst for National Alliance Capital Markets.

The company said it's Blizzard division, which makes World of Warcraft and other high-margin Internet games, will release two titles this year after the first quarter, including "Diablo 3," but executives declined to give specific release dates.

These new games will drive earnings of the U.S.'s largest video game publisher this year. It now expects $4.5 billion in annual revenue in 2012 and earnings per share of 94 cents. This is slightly below the $4.55 billion in revenue analysts were expecting on average in 2012, according to Thomson-Reuters I/B/E/S.

For the first quarter, the company expects EPS of 3 cents per share on revenue of $525 million, which falls short of analysts' expectations of EPS of 14 cents per share on revenue of $771.1 million.

Activision's fourth-quarter sales for the three months ended December 30 fell 6 percent to $2.4 billion. Analysts were expecting sales of $2.2 billion, according to Thomson Reuters I/B/E/S.

Adjusted for the deferral of revenue from digital content, Activision posted a profit of $725 million, or 62 cents per share, which beat Wall Street estimates of 56 cents a share.

One of the surprise hits for Activision this year was its kids game "Skylanders," which incorporated plastic toys with a console video game. It sold more than 20 million toys so far and CEO of Activision Publishing Eric Hirshberg told analysts on the conference call that the franchise was on track to being "a $1 billion business."

In recent quarters, investors have been concerned the company is not diversified enough with its titles. Having a new mainstream hit will be viewed positively by Wall Street, said Hickey, the National Alliance analyst.

The company also announced it would buy back $1 billion of its stock starting in April and that it will increase its dividend, which it will pay out on May 16, by 9 percent.

The company's shares rose 9 cents, or 0.7 percent, in after-market trading to $12.75 per share.

(Reporting By Liana B. Baker; editing by Phil Berlowitz and Andre Grenon)

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