It detects the voltage changes at the wires of brushless motor, and then outputs the RPM signal.
This RPM sensor can work with some speed control systems for helicopters. And one of its typical applications is to work as the RPM sensor for V-Bar system made by Mikado (www.mikado-heli.de).
The lead A and lead B is connected to any 2 wires of the brushless motor (Do not need to consider about the polarity). The lead C is a three color wires with a connector at the end, the black wire is the ground wire, the red wire is connected to 3.3V or 5V to supply the sensor, and the white wire outputs RPM signal.