I was browsing around and found this blog post:
http://erikej.blogspot.com/2010/04/version-3-of-exportsqlce-now-available.html
(It is for a great add in if y
If you are asking how this is done, I'm not sure how it is implemented exactly. I know that you can create ssms plugins in visual studio, and I'm sure that there is a way to take a filestream object and decode it.
If you are looking for a way for you to do this besides the plugin you mentioned, there is a great freeware plugin I use. You can find a plugin ssmsboost at http://www.ssmsboost.com. This plugin has a community version and a pro version. The only difference between the two is that the community version needs to be renewed every 120 days. This plugin has a lot of nice features, but the one you're asking for is
SSMS Results Grid Visualizers:
Feature allows to export & view files or some big amounts of text or XML data from tables (like files from document storage of sharepoint services). Required data should be simply output to ResultsGrid. By right-clicking the cell with required value and selecting "Visualize As->.." you can tell to save data to file with predefined name and open it with custom or default application. No matter than SSMS truncates long data from VARBINARY/VARCHAR fields when outputing them to ResultsGrid: SSMSBoost works with internal storage of SSMS and extracts complete cell value. Below you can see how a picture from [LargePhoto] field of [Production].[ProductPhoto] table from [AdventureWorks] database is being visualized: