The Azeroth exodus continues for Activision Blizzard (NAS: ATVI) . The company's flagship MMO franchise, World of Warcraft, suffered its steepest subscriber drop to date, plummeting all the way to 9.1 million subscribers from the 10.2 million players the company claimed at the end of its last quarter.

That orc-sodus from the lands of Azeroth was offset by three huge first-half releases, including the record-breaking Diablo III, which hit the market this May. Skylanders was also a huge success for Activision, claiming the crown as the best-selling console and hand-held game over the first half. Skylanders, which uses RFID-enabled collectible figurines as a form of memory storage, also trounced the action-figure market, taking first place in action-figure sales for the same period. And, of course, the latest Call of Duty game also sold phenomenally well.

Let's take a look at Activision's latest information to figure out how the company's changing to cope with WoW's decline, and if it can continue to charge forward in the future.

What the numbers tell you
The combined effect of new hits and WoW attrition adds up to an unremarkable quarter. Activision beat analyst expectations on both top and bottom lines, but those expectations ($837 million in revenue) were rather tepid for a company that regularly posts a billion dollars in sales. Both results were lower than the year-ago quarter, though free cash flow improved:

Sources: Morningstar and company earnings report.

Sources: Morningstar and company earnings report.

Activision's upcoming quarters are where the real magic happens. The rest of the year has Activision brass' thumbs up, as it bumped full-year GAAP revenue guidance to $4.33 billion from $4.20 billion while also nudging earnings-per-share estimates to $0.69, a $0.04 increase. But that's not necessarily a positive trend -- 2011's revenues clocked in at $4.76 billion, and EPS for that year were $0.92.

Looking to the future
Second-half drivers will be expansion packs for both WoW and Skylanders, as well as a new Call of Duty release, Black Ops II. With a projected 16 weeks to release, Black Ops II has scored 508,000 Xbox 360 pre-orders, according to games-industry research site VGChartz. The last Call of Duty game had 604,000 Xbox 360 pre-orders at the same 16-week pre-release point. Unless interest suddenly spikes, Activision's latest shoot-'em-up blockbuster may be the first to underperform its predecessor.

The biggest story here continues to be WoW's long-running decline. Since its 12 million subscriber high-water mark, reached during the third quarter of 2010, World of Warcraft has lost a quarter of its players. It's taken a lot longer to shed that much of its subscriber base than Electronic Arts' (NAS: EA) competing Star Wars MMO --a single quarter slashed a quarter of EA's subs -- but Activision's just lost nearly as many subscribers as EA has in total.

Here's what I said in a comment on Evan Niu's fourth-quarter Activision earnings recap, earlier this year when WoW's subscriber losses seemed to have evened out:

I'm not surprised WoW [subscribers] didn't drop much in the fourth quarter. Blizzard released the final boss patch of the expansion at the end of November, and [Star Wars] didn't come out until the end of December, if I recall. WoW's next big subscriber drop might not come until the second quarter, in the lull between beating the final boss and the release of the Kung Fu Panda expansion, which I honestly don't expect to stem the tide by much.

Activision bulls may claim that the next WoW expansion will add new subscribers, but history's already proved that argument very wrong. Remember, that 12-million-subscriber peak occurred before the current Cataclysm expansion came out in 2010's fourth quarter. It's been a long slide downhill since. The game is now nearly eight years old and has proved remarkably resilient, but its glory days are over. Chinese partner NetEase.com (NAS: NTES) has also suffered through consecutive declines in its WoW-based revenue, so investors shouldn't be relying on the Middle Kingdom to keep WoW afloat.

Skylanders has done very well, but it seems to have merely supplanted the monthly fees of lost WoW subscribers. The lower preorder numbers for Black Ops 2 (though PS3 pre-orders are in line with the last game) are also a big red flag, since these are the company's two biggest cash cows. Diablo III, which has sold more than 10 million copies, will help keep Activision moving forward -- but blaming that game on WoW's decline, as Blizzard CEO Mike Morhaime did in the company's earnings call, doesn't mean those subscribers will return when they tire of Diablo's click-happy gameplay.

Putting it all together
The huge drop in WoW subscribers, regardless of any new game initiatives, should give investors serious pause before they claim that Activision can grow in the future. The company's games are certainly far stickier than Zynga's (NAS: ZNGA) and aren't likely to lose players to FarmVille or CityVille or WhateverVille. But Skylanders is Activision's only new game, and it's merely replacing lost earnings from games on the decline rather than adding to the growing revenues of fresh blockbusters. Other big hits are sequels that don't generate the same steady monthly income streams as WoW's dedicated (but dwindling) fan base.

Activision isn't likely to decline anywhere as precipitously as Zynga and EA have this year, but a flat stock isn't the best place for your money -- and Activision, despite its continued dominance, has been more or less a flat company, as you can see in that chart. Do you believe I'm wrong? Will Activision's upcoming product slate overcome WoW's decline? I'd love to hear your opinion, so please let me know with a comment.

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The article Activision Blizzard Treads Water as "Warcraft" Burns originally appeared on Fool.com.

Fool contributorAlex Planesholds no financial position in any company mentioned here. Add him onGoogle+or follow him on Twitter,@TMFBiggles, for more news and insights.The Motley Fool owns shares of Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Activision Blizzard and NetEaseand creating a synthetic long position in Activision Blizzard. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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