Image processing to reduce the noise produced by small sensors or high ISOs.
Noise is caused by random variations in the light captured by each photosite (pixel) on the sensor. Some cameras have sensors which apply 'on-chip' noise reduction, where electronic circuitry adjusts the signal values captured by the sensor's photosites. This is probably the best sort.
Otherwise, noise reduction is applied by the camera to the raw image data as it's processed to produce the photo. This reduces noise, but can result in smudging and loss of detail.
The same applies to noise reduction processes applied using software on a computer, though with more processing power available and more time to find the best settings, this may produce better results.
In any event, noise reduction is something you'd rather wasn't necessary at all. Using a small sensor and applying noise reduction is not as good as using a larger sensor which doesn't need it.
