This drop-down field lists all of the available schemas that can be used with this web part. The default is "Utilize All Schemas." However, you can choose to include only those lists that utilize a particular schema. This can be useful if you want to narrow your search to those list templates that include the fields that you want to use.
Schemas contain the elements that identify a list: the list type, filter and search fields, display fields, and so on. When you select a schema, the elements of that schema will be used to find only those lists that match that schema profile. Lists of schemas can be found in the Supported Schemas section of this web part help.