While some manufacturers now offer laser-cut grooves as an option the traditional method involves a machine that scores a ‘v-groove’ into the PCB, like so:
This is how V-Grooves are cut into PCBs. V-Grooves are half-cuts into the PCBs that allow them to be snapped apart easily. Minimum V-Groove cut length in generally 8cm due to machine cutting length. V-Grooves must be cut across the entire PCB length, it is not possible to make short internal cuts.
Here are some additional links for reading up on V-grooves:
[via Dangerous Prototypes]