If he's talking about interpreted server-side code that's not very realistic. The third party has total physical access to the machine. It's pretty hard to have the code run and remain encrypted at all times -- impossible in most cases. The closest real thing you can do is obfuscate your code, which can make things painful for you as well.

If you're a US company and the third party is as well I'd just rely on copyright law for protection. If they're a foreign company it's more difficult.