SEOUL—As Samsung Electronics Co.'s mobile business stumbled over the past year, the South Korean technology giant found a measure of salvation in its surging semiconductor unit.

But no more. On Thursday, Samsung reported a 40% drop in net profit for the last three months of 2015 to 3.2 trillion Korean won ($2.65 billion), as its chip business recorded its slowest quarter of profit growth in more than three years.

Samsung's mobile business didn't fare much better, depriving the company of its two key profit drivers as a broader global economic downturn threatens to exacerbate a natural slowdown in the maturing smartphone market.

"Samsung's main business units are all facing a downturn," says C.W. Chung, an analyst for Nomura in Seoul.

Company executives suggested that there would likely be more pain to come this year, helping send shares in the company down 2.6% on Thursday, wiping out about $3.5 billion in its market capitalization.

Samsung mobile executive Lee Kyeong-tae warned that "competition among smartphone players will intensify even further as a consequence of market growth slowdown."

The company's investor relations chief, Robert Yi told analysts that "it will be a challenge to maintain last year's earnings levels" in the first half of the year, citing macroeconomic headwinds and forecasts of slack demand for information-technology products.

While Mr. Yi said he hoped for a modest improvement in the second half of the year, other executives tried to emphasize Samsung's longer-term prospects, pledging a renewed push to develop an ecosystem of mobile software and services to attract and keep more smartphone users.

They also said they would focus on winning consumers of low- and midrange smartphones in developing markets, many of whom are buying smartphones for the first time.

"Executives are touting a lot of new business pushes in different areas, but they have yet to translate into solid results," said Mr. Chung of Nomura, who noted that most analysts now expect Samsung's operating profit to fall this year from the $21.9 billion that it earned in 2015.

"If the company manages to sustain last year's profit levels this year, that'll be impressive," he said.

Samsung isn't the only technology company to send a warning signal on growth. Samsung's U.S. semiconductor peers Intel Corp. and Qualcomm Inc. have reported weaker earnings as growth in demand for smartphones and other IT products slows, while Apple Inc. on Tuesday forecast its first revenue decline since 2003 as iPhone sales slowed.

But Samsung is particularly vulnerable. It is the world's biggest producer of smartphones and memory chips used in everything from mobile phones to personal computers. Research firm Gartner estimates global chip sales fell 1.9% last year, the first decline since 2012.

Global smartphone shipments grew at just 6% in the fourth quarter, according to data tracker Strategy Analytics.

Samsung has long touted its diversified approach to the technology business, with cyclical downswings in chips offset by gains in mobile devices, and stable if unspectacular revenue from the company's television and home appliance businesses.

Indeed, those products were a rare bright spot for Samsung, though TVs and appliances contribute less than 5% of Samsung's overall operating profit.

In the longer term, Samsung executives laid out a road map to competitiveness in the mobile business, creating a collection of software and services unique to Samsung smartphones that can help the company differentiate itself from a growing herd of Android smartphone manufacturers.

Late last year, Samsung stripped its longtime mobile chief J.K. Shin of his day-to-day duties, and promoted the mobile research and development chief D.J. Koh. Instead of replacing Mr. Koh with one mobile R&D chief, Samsung appointed two executives: one to oversee mobile hardware R&D, and the other mobile software R&D.

The reason, explained Mr. Lee, the Samsung mobile executive, is to "accelerate innovation on software and services, while developing and identifying new business opportunities." Mr. Lee cited Samsung Pay, the company's mobile payment service, as a sign of success, adding that the service would be rolled in China and parts of Europe this year.

But Samsung's software and services ambitions will take several quarters or more to hit the bottom line, if they succeed. Meanwhile, Samsung will remain reliant on chips and phones to drive growth—and the headwinds there are much stronger than a year earlier.

In the fourth quarter, Samsung's operating profit from chip sales inched up just 3.7% despite robust revenue, reflecting a sharp fall in profit margin to 21%--the lowest level since the second quarter of 2014.

In the mobile-phone business, Samsung continues to suffer from stiff competition from low-cost Chinese brands that have squeezed Samsung's mobile margins and eroded its market share.

While operating profit from Samsung's mobile business rose 14% from the disastrous fourth quarter a year earlier, mobile revenue slipped. Mobile profit margin edged up to 8.9% from 7.5% a year earlier.

To lift its flagging share price, Samsung has vowed to return 30% to 50% of its annual free cash flow to investors through buybacks and higher dividend payouts. The company said it had already bought up and canceled 4.25 trillion won of shares in the first phase of the buyback program.

On Thursday's earnings call, Mr. Yi said that while Samsung would nudge its dividend higher, it hadn't yet determined how it would meet its shareholder return target this year, saying that, "given all the uncertainty in the market, it's difficult to have visibility on any capital expenditure plans as of yet."

Even so, the company's cash levels piled up to 71.54 trillion Korean won, the highest level in the company's history.

Write to Jonathan Cheng at jonathan.cheng@wsj.com and Min-Jeong Lee at min-jeong.lee@wsj.com

 

(END) Dow Jones Newswires

January 28, 2016 05:35 ET (10:35 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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