Theoretically, it's a shorthand term for "hentai", which means "pervert" or "perverted". It can be used in a lot of ways, but the general use is that it's something less than explicit sex/nudity, but skirts the line VERY closely. Rosario+ Vampire, Kill la Kill, etc. Sometime's it's used in regards to merchandise as well. So, things like dakimakura, or resin statuettes and the like, with characters in fanservicey outfits not from their series (Spice and Wolf and Evangelion have a lot of these)