If this is checked, then whenever a new full backup is performed all old backup sets will be moved to ZIP files. Each ZIP file will contain one backup set, i.e. one full backup and any diff backups referencing it. The filename will identify the timeframe where the backups are included (i.e. the timestamp of the full backup and the timestamp of the latest diff backup).
NOTE:
The setting "Max number of backup sets" applies to backup ZIP files created by thinBackup as well. Also note that in case "Clean up differential backups" is checked it is performed before zipping is run (i.e. there will be no diff backups in the ZIP files).