Activision Blizzard, the largest U.S. video publisher, posted better-than-expected revenue in the third quarter and raised its earnings outlook on strong demand for its holiday games.

For the three months ended Sept 30, Activision's revenue rose 1.2 percent to $754 million. Taking into account the deferral of digital revenue from online games, its revenue fell 27 percent to $627 million.

The revenue drop was expected by analysts, since the company released a new version of the popular game, StarCraft in the quarter a year ago. The revenue figure beat analysts' expectations of $558.4 million.

The company reported net income of $148 million, or 13 cents per share, which compares to $51 million or 4 cents per share a year earlier.

Adjusted for revenue from online games, it posted earnings per share of 7 cents, which compares to 12 cents per share a year earlier.

The company said it was raising its annual outlook on the stronger-than-expected showing of its new kids game, Skylanders which launched in October as well as Call of Duty: Modern Warfare 3, its biggest video of the year. The latter game hit stores ahead of its earnings report on Thursday.

Activision now expects earnings per share of 85 cents on revenue of $4.25 billion for 2011, which would beat the average estimate by analysts of 79 cents on revenue of $4.11 billion.

It previously expected earnings per share of 77 cents on revenue of $4.05 billion.