What it does is take the source code and encodes it in a manner that makes it unreadable to humans. The code can then be safely distributed with your intellectual property intact. One of the applications that can be used to obfuscate and license your code is a combination of products called Iono and PHP Encoder by IonCube.
They look at the setup of the application, some of the requirements you'll need to get it working and a quick description of how it works (a "shopping cart" for users to purchase license for your software). The integration of the application into your files (the other half of the equation) can be done with one of five different kinds of licenses (including per page and a local license covering all files).