UPDATE 3-Activision results top Street, starts dividend

* Q4 EPS ex-items 49 cts vs Street view 43 cts

* Q4 non-GAAP rev $2.5 bln vs Street view $2.2 bln

* Declares 15 cent dividend, $1 billion stock buyback

* FY 2010, Q1 forecasts below Street view

* Shares up 5.4 pct (Adds analyst comment, details from call, updates share price)

By Gabriel Madway

SAN FRANCISCO, Feb 10 (Reuters) - Activision Blizzard Inc (ATVI.O) posted better-than-expected results on Wednesday, fueled by its hit holiday release "Call Of Duty: Modern Warfare 2," and shares rallied 5.4 percent as the company said it would start paying an annual dividend.

The world's largest standalone game publisher by market value has risen above much of the turmoil in the gaming industry thanks to blockbuster titles like "Call of Duty" and its margin-friendly online game "World of Warcraft."

Hudson Square Research analyst Daniel Ernst said the dividend was an added bonus on top of a good quarterly report. He said the company's forecast, while conservative as expected, didn't set off any alarm bells.

"A dividend in video game land is completely new. It's a small yield, but it's a positive sign that the company cares about shareholders ... this is a very well-run company," Ernst said.

Activision declared an annual dividend of 15 cents a share, and also announced a $1 billion stock buyback program.

"It shows you the strength and the confidence we have," Chief Executive Bobby Kotick said in an interview with Reuters. Still, he said, the macroeconomic conditions hurting the video game sector have not improved.

Last year was a difficult one for the industry, as casual gamers dialed back on spending. Software sales slid 11 percent last year in the United States, the world's largest market.

But many analysts expect game software to grow robustly this year over the depressed levels of 2009.

The music category was particularly hard hit last year. Activision, which publishes the "Guitar Hero" franchise and its various spinoffs, will reduce the number of its music titles in 2010, but said it expects the segment to be more profitable.

The company also plans to release another "Call of Duty" title for the holiday season, and will launch a new expansion pack for "World of Warcraft, a multiplayer online game that has 11.5 million subscribers.

Activision's shares are down 9 percent this year, and analysts in recent weeks have said the company's shares may be oversold.[ID:nN03193577]

BEATING ESTIMATES

Activision posted a net loss of $286 million, or 23 cents a share in the fiscal fourth-quarter ended Dec. 31, versus a year-ago loss of $72 million, or 5 cents a share.

Excluding items, Activision earned 49 cents a share, beating analysts' average estimate of 43 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell 5 percent to $1.6 billion. Non-GAAP revenue came in at $2.5 billion, better than the Wall Street estimate of $2.23 billion.

Sales in the quarter were led by the latest release in the "Call of Duty" franchise, which has sold nearly 12 million units in the world's biggest video game markets, according to industry trackers NPD Group, GfK Chart-Track and Enterbrain.

Wall Street was expecting cautious targets from Activision, and the company did indeed set current-quarter and 2010 forecasts below Wall Street analysts' estimates.

For 2010, Activision forecast non-GAAP earnings of 70 cents a share and non-GAAP revenue of $4.4 billion. That was lower than the average analyst estimate for a profit of 73 cents a share on revenue of $4.8 billion.

Earlier this week, Activision's struggling rival Electronic Arts ERTS.O also issued a conservative forecast for its next fiscal year. [ID:nN05170474]

Shares of Santa Monica, California-based Activision closed at $10.10 on the Nasdaq and rose to $10.65 in extended trading. (Reporting by Gabriel Madway; Editing by Robert MacMillan, Gary Hill)